By Vinjeru Mkandawire
Until recently, the paths of venture capital investors and private equity funds rarely crossed. Venture capital firms have historically invested in early-stage startups with high potential while private equity firms typically invest larger amounts of capital into more mature businesses.
Now, with historic amounts of capital propelling the search for the next unicorn, Wall Street’s arrival on the fintech startup scene is a sure sign of boom times.
Goldman Sachs is the latest among a plethora of bulge-bracket investors like
The Wall Street bank has quietly made inroads into the fintech investment ecosystem and is rumored to have formed an advisory group to target smaller fintech deals, two sources said.
A third source with close ties to the bank was unable to comment on the rumors but said that Goldman Sachs appears to be one of the “more active” banks in the fintech space right now.
So far this year, Goldman Sachs has participated in $95.5 million worth of funding rounds in bitcoin startup Circle, payment cycle management business Billtrust and high frequency trading network company Perseus, according to press reports.
For the Circle and Billtrust deals, Goldman Sachs invested alongside co-investors including Beijing-headquartered IDG Capital Partners, Accel Partners- an early Facebook investor- and Bain Capital Ventures, whose success stories include LinkedIn.
Goldman Sachs also advised Funding Circle on its $150 million equity financing round in April this year, according to press releases.
Last year, global fintech investment soared by 201 percent to more than $12 billion spread across over 730 deals, according to CBI Insights. The blog behind fintech conference Finovate has tracked more than $7.85 billion in fintech funding so far in 2015.
Yet alarms continue to be sounded over the surge in billion-dollar startups with hefty valuations, mixed financials and questionable burn rates, echoing earlier warnings issued before the dot-com bust.
The so-called “unicorns” in the infamous “billion-dollar club” include Uber, which- at a valuation of $50 billion- places its market value above 80% of all S&P companies. Fellow unicorn AirBnB doubled its valuation in less than 12 months to more than $20 billion this year while Snapchat is reportedly valued at $16 billion, in spite of its unproven business model. A recent entrant to the billion dollar club from the fintech space is Transferwise, which raised $58 million from Andreessen Horowitz in a deal that reportedly valued the business at $1 billion.
As one former investor of the 90s put it, “The tech startup scene has a short term memory”.
The current valuations for some fintech models that have never been through a cycle or downturn are “insane”, cautioned the first source. How some of these startups will fare when the economy dips is an important question for investors that could be risking steep losses, he added.
Sky-high fintech valuations are simply being used for “marketing purposes” and will soon be corrected by the markets, the second source said.
At best, a few market leaders of scale within the ever-growing and increasingly crowded fintech space will weather any future downturns. But if Goldman Sachs going up against VC investors with a fraction of its financial muscle is anything to go by, the party won’t end just yet.
Vinjeru Mkandawire covers TMT (Telecoms, Media and Technology) M&A activity across Europe, the Middle East and Africa. Based in London, she tweets regularly (@VinjeruM) about technology and the emerging markets and can be reached at vinjerum@mergermarket.com
