“We need to act fast before it’s too late”: Innovate Finance says UK FinTech sector faces ‘significant’ Covid-19 induced funding gap

Technology

Innovate Finance, the industry body representing the FinTech sector in the UK, has warned that the sector is facing a “significant” funding gap as a result of the Covid-19 crisis – with smaller companies coming under growing pressure.

A survey released this week by Innovate Finance shows that some of the smallest UK FinTech companies only have a cash runway of six months or less. The survey also revealed that over 75 per cent of smaller FinTech companies are worried about the next funding round, with over 70 per cent of all respondents having received no private funding since the start of lockdown.

The online survey, which was carried out in the first two weeks of June, had 126 participants. Almost two-thirds of the respondents are small firms with 25 or fewer employees, while less than 10 per cent have more than 250 employees.

Over three-quarters of FinTech start-ups with 25 employees or fewer are turning to government for funding support – having applied, or intending to apply, for one of the newly formed support programmes designed to keep businesses on their feet amidst the Covid-19 crisis. 

However, many of the surveyed start-ups also flagged that current government funding programmes are unsuitable for early-stage FinTechs – categorised as pre-seed and seed funding rounds. In particular, support schemes do not incorporate the EIS/SEIS programmes – tax relief schemes designed to encourage investment in small unlisted companies.

Key findings of the industry survey also showed a difference between big and small in the sector – with smaller FinTech companies, defined as having 25 or fewer employees, being most at risk from the impact of Covid-19. 

Larger companies, with more than 100 employees, are less worried about funding, although 30 per cent expressed concern. Just under 80 per cent of larger FinTechs have a cash runway of 12 months or more.
 
Overall, 60 per cent of businesses are looking at adapting their strategy in order to survive the crisis and grow in the future. Most are considering diversifying their revenue (32 per cent) or ‘pivoting’ the business (30 per cent), while 11 per cent are looking at closing or mothballing the business.
 
The survey shows the extent to which the funding tap has dried up as a result of Covid, according to Innovate Finance. Over 70 per cent of FinTechs responding – regardless of size – have received no private funding during the crisis. 

For those that have attracted private funding, Angel investors have been the most common source – with 10 per cent of companies receiving investment in this way. Smaller companies have had an even greater reliance on Angels, accounting for 50 per cent. But other forms of investment – from institutional or corporate VC, private equity or family office – have been minimal.

“It’s evident that the FinTech sector faces a significant funding gap as a direct result of Covid-19,” said Charlotte Crosswell, CEO of Innovate Finance. “We need to act fast before it’s too late. If we fail to address this, we risk losing many companies in the fastest-growing sector in the UK economy – one that has enormous potential to transform every aspect of our lives and underpin the digital future.” 
 
She added: “We cannot turn our backs on the start-ups now or we will pay the price later down the line. Many FinTech companies have been unable to leverage many of the current government schemes due to their growth profile. We call for government to support companies with growth capital and keep our FinTech sector on its feet.” 
 
Funds flowing into UK FinTech hit record levels in 2019, rising 38 per cent to USD4.9 billion – with 50 per cent of investment into UK FinTech companies in the last few years originating from overseas investors. However, investment in the first quarter of 2020 was USD1.1 billion – down from USD1.74 billion in Q1 2019. 

Innovate Finance said it remains to be seen whether this trend will continue throughout the year, pointing out that investors had previously said that they remain “relatively upbeat”.