A Unicorn is a tech startup that has grown past $1 Billion in valuation. The term “Unicorn” to refer to these firms was first coined by Aileen Lee, a Silicon Valley investor, in 2013. Since then the count of Unicorns has increased to about 300 at the start of the year. Silicon Valley has boasted 9 of the 29 Fintech Unicorns across the world.
This week, the news on the streets is that London would go past Silicon Valley in the Fintech Unicorns tally. London already has 7, and there are a good few companies in the pipeline raising funding to get past Silicon Valley’s 9. Let us look at the irrational exuberance of the London Fintech market and the funding it received.
London received 39% of European Venture Capital funding. The revenues of Fintech firms in London increased from $100 Million to about $230 Million in the last 12 months. Fintech in London is also the fastest growing job sector. Monzo and Tandem got headlines earlier this week due to their new funding rounds. Monzo is receiving capital from Y Combinator and a few other Silicon Valley investors, and Tandem has closed an £80 Million funding round.
However, this is just how growth has manifested itself. There are some fundamental changes to the Venture capital mindset that has caused this Unicorn madness. There are abundant sources of funding these days. The number of platforms that a tech startup can leverage to get funding is increasing on daily basis.
Incubator and accelerator programs inspired by the successes of Y Combinator, Seedcamp etc., are numerous. There are several entrepreneurs who have exited and started to give back to budding start ups as Angels. This used to be the case in Silicon Valley, and London’s entrepreneurs are no different. Over the last 12 months, I have come across atleast 20 firms that have received angel funding from founders of more established or exited tech firms.
Family Offices and even Pension funds these days make direct investments into the tech startup world. Many of them shy away from traditional Venture capital model due to the fees involved.
That has increased the flow of capital directly into private tech firms. Also, the size of late stage funds like Softbank’s fund, and Sequioa’s $8 Billion fund means, firms are adequately funded at a later stage too.
If all these options weren’t enough, in the UK, we have the EIS/SEIS schemes that offer very attractive tax benefits for investors into tech startups. Most HNIs and UHNIs are keen to ensure they utilize these tax schemes. Crowdfunding platforms help, and more recently, the ICO and STO methods of raising capital globally have had their effect as well.
Apart from these financing options, the monopoly that some of the Silicon Valley start ups have taken in their markets, is now used as a model of growth. Once the product market fit is identified, firms these days throw money at growth – crazy growth. This results in market dominance, and that itself becomes the barrier to entry for competitors.
Gone are the days where technology, business models, and even operational excellence differentiated the great from the good.
This growth often means, firms have no respect for operational excellence, or very little intent on achieving a viable business model. They only focus on growing fast, raising more at higher valuations and achieving a Unicorn status. Even VCs these days are judged based on the Unicorns in their portfolios.
This growth at any cost and irrational valuation models had caused the dot com bubble to burst about 20 years ago. And this is definitely not another “the recession is coming” post. But it is important to understand that Unicorn status doesn’t mean much anymore. For an early stage angel investor, an increase in valuation from say $2 Million pounds (when they invest) to when the firm hits $1 Billion in valuation, makes a big difference. But in the broad scheme of things, this is just an artificially created tag often used for branding.
Investors and firms riding this wave of irrational exuberance need to time their exit right. If the correction blindsides them, it may be another financial crisis. It’s sad that London’s Fintech has gone down this path that Silicon Valley firms have traveled for years. It’s superficial and doesn’t feel right.
Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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