By Slava Solodkiy for Forbes
The past six months of 2016 were a record high for fintech investment. And for the first time ever, Asia has become the #1 market in terms of the amount invested.
However, this is trivial. Such headlines as, “Last month\quarter\six months were a record high for fintech investments,” are suitable only for media. From the market perspective, fintech (like any other new and fast growing industry) is growing at the exact rate it should be. But if it stops doubling every year and slows down its growth or starts to grow four times faster, then it’s worth writing about.
The market doubles every year. It is neither good nor bad – it is normal. In reality, it will sound like: “The mass of the moon is 81 times less than the mass of the Earth: the market experts are concerned”. Yes, it’s less, so what? At the moment, I would single out three much more important fintech issues, rather than “record volume of deals”.
1. Scaling – As little as 30 companies worldwide show that they are able to quickly export their products and services to other countries. All this amid 50 unicorns and more than 5,000 fintech startups all around the world. The problem is not only in their desire and ability: most markets are lackingBaaS-platforms for scaling, and local regulatory policy does not allow to quickly and cheaply license independently. For Asia, the problem of scaling is “the dual challenge” – so many countries, and all of them so different.
2. “Round B problem” – Both dry statistics and my personal experience evidence that medium-sized companies face the future funding problem. Such companies are already successful in one market and “burn” a lot of money, but in most cases, they are still loss-making. In Asia, there is no problem with seed capital, and there are many potential strategic investors or buyers; but with “round B” financing we can face the “bottleneck” effect.
3. The growth of companies through mergers and acquisitions is a third problem derived from the first two. At this stage, neither “cash exit” for founders of acquired services nor acquisition of a ready-made business is applicable. Here arises the need to merge through the exchange of shares. The startups and their founders are not always mentally prepared for such changes or do not see the whole picture. The final buyers and strategic investors do not want to engage in this and find it easier to hire a “wrapper”, which is reasonable. Any Asian “big guy” will tell you that he does not want to invest in local leaders – only in pan-Asian players. We can wait for their organic growth (for several years) or start to think about M&A (several Chinese companies already provided great examples of less arrogant development, look at Didi Chuxing’s case).
However, to be honest, most of these investments account for China – and this is the challenge for Japan, South Korea, and Singapore, which are trying to promote themselves as fintech hubs. Also, we still haven’t seen any successful Asian fintech startup that are successful in scaling (even giants like AliPay, Samsung Pay, Kakao Wallet and others are losing this part of the competition).
It is a “moment of truth” for all new potential fintech hubs. Many countries have joined the rush for fintech development this year, including in Europe (France, Switzerland, Austria, Sweden, Denmark), Asia (Singapore, Hong Kong, South Korea, Japan, India and Taiwan), Australia and Canada. The only question is: where are the hundreds of transactions and dozens of exits? I don’t mean articles, hackathons, awards, sandboxes and accelerators here, I mean real business – where is it?
In fact, the explosive growth in Asia accounts for only a few of China’s giants, take them away and there is no growth in Asia. It is impossible to build fintech in a single country, as all entrepreneurs may live any place, they move around easily and intend to build international businesses, rather than local ones. This year will show a new renaissance wave of real deals in fintech in Asia, after addressing some of these issues I’ve raised.
Vladislav Solodkiy is managing partner at Life.SREDA, Singaporean-based fintech VC, and the author of “Money of the Future” semi-annual fintech-report.