Category Archives: Venture funding Best Practices

The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction

Fenwick & West LLP | Ran Ben-Tzur and James D. Evans | Dec 5, 2019

Direct listing - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From FictionJust What Is a Direct Listing?

For people not familiar with the term, a direct listing is an alternative way for a private company to "go public," but without selling its shares directly to the public and without the traditional underwriting assistance of investment bankers.

In a traditional IPO, a company raises money and creates a public market for its shares by selling newly created stock to investors. In some instances, a select number of investors may also sell a portion of their holdings in the IPO, although in most instances this opportunity is reserved for very large stockholders or employees and is not made broadly available to other pre-IPO stockholders. In an IPO, the company engages investment bankers to help promote, price and sell the stock to investors. The investment bankers are paid a commission for their work that is based on the size of the IPO—usually 7 percent in the case of a traditional technology company IPO. In a direct listing, a company does not sell stock directly to investors and does not receive any new capital. Instead, it facilitates the re-sale of shares held by company insiders such as employees, executives and pre-IPO investors. Investors in a direct listing buy shares directly from these company insiders.

See:  Shifting from Institutions to Retail Clients — NYSE direct listings

So now you ask: If my company does a direct listing, does this mean that we don't need investment banks? Not quite. Companies still engage investment banks to assist with a direct listing, and those banks still get paid quite well (to the tune of $35 million in Spotify and $22 million in Slack). However, the investment banks play a very different role in a direct listing. Unlike in a traditional IPO, in a direct listing, investment banks are prohibited under current law from organizing or attending investor meetings, and they do not sell stock to investors. Instead, they act purely in an advisory capacity, helping a company to position its story to investors, draft its IPO disclosures, educate the company's insiders on the process and strategize on investor outreach and liquidity.

Why Have Companies Only Started Considering Direct Listings Recently?

The concept of a direct listing is actually not a new one. Companies in a variety of industries have used similar structures for years. However, the structure has only recently received a lot of investor and media attention because high-profile technology companies have started to use it to go public. But why have technology companies only recently started to consider direct listings? A few trends have emerged in recent years that have made direct listings a viable, and sometimes attractive, option relative to an IPO:

The Rise of Massive Pre-IPO Fundraising Rounds: With an abundance of investor capital, especially from institutional investors that historically hadn't invested in private technology companies, massive pre-IPO fundraising rounds have become the norm. Slack raised over $400 million in August 2018—just over a year prior to its direct listing. Because of this widespread availability of capital, some technology companies are now able to raise sufficient capital before their actual IPO either to become profitable or to put them on a path to profitability.

The Insider Sentiment Against the Current IPO Process: There has been increasing negative sentiment, especially amongst well-known venture capitalists, about certain aspects of the traditional IPO process—namely IPO lock-up agreements and the pricing and allocation process.

IPO Lock-Up Agreements. In a traditional IPO, investment bankers require pre-IPO investors, employees and the company to sign an agreement restricting them from selling or distributing shares for a specified period of time following the IPO—usually 180 days. This agreement is referred to as a "lock-up agreement." The bankers argue that these agreements are necessary in order to stabilize the stock immediately after the IPO. While the merits of a lock-up agreement can certainly be debated, by the time VCs (and other insiders) are allowed to sell following an IPO, oftentimes the stock price has fallen significantly from its highs (sometimes to below the IPO price) or the post-lock-up flood of selling can have an immediate negative impact on the trading price.

See:  IPOs are a racket. But try finding something better

Over time, VCs have gotten companies to chip away at the standard 180-day lock-up period. For example, on many recent IPOs, companies have been able to negotiate for an early release of the 180-day lock-up if the company's stock price has traded above certain thresholds after the IPO or if the lock-up period expires during a blackout period under a company's insider trading policy. Despite this, lock-ups haven't gone away completely.

In a direct listing, there is no lock-up agreement. All of the company's insiders are free to sell their shares on the first day of trading, providing equal access to the offering to all of the company's pre-IPO investors, including rank-and-file employees and smaller pre-IPO stockholders.

IPO Pricing and Allocation. In a traditional IPO, shares are often allocated directly by a company (with the assistance of its underwriters) to a small number of large, institutional investors. Traditional IPOs are often underpriced by design to provide large institutional investors the benefit of an immediate 10-15 percent "pop" in the stock price. Over the past few years, some of these "pops" have become more pronounced. For example, Beyond Meat's stock soared from $25 to $73 on its first day of trading, a 163 percent gain. This has fueled a concern, particularly shared amongst the VC community, that investment banks improperly price and allocate shares in an IPO in order to benefit these institutional investors, which are also clients of the same investment banks that are underwriting the IPO. While the merits of this concern can also be debated, in instances where there is a large price discrepancy between the trading price of the stock following the IPO and the price of the IPO, there is often a sense that companies have left money on the table and that pre-IPO investors have suffered unnecessary dilution. If the IPO had been priced "correctly," the company would have had to sell fewer shares to raise the same amount of proceeds.

Because a company is not selling stock in a direct listing, the trading price after listing is purely market driven and is not "set" by the company and its investment bankers. Moreover, since no new shares are issued in a direct listing, insiders do not suffer any dilution.

See:  The Solution To The Fintech IPO Shortage

The Spotify Effect:  Before Spotify's direct listing, technology companies hadn't used the direct listing structure to go public. Spotify was, in many ways, the perfect test case for a direct listing. It was well known, didn't need any additional capital and was cash flow positive. In addition, prior to its direct listing, Spotify had entered into a debt instrument that penalized the company so long as it remained private. As a result, it just needed to go public. After clearing some regulatory hurdles, Spotify successfully executed its direct listing in April 2018. After Spotify's direct listing, Slack (relatively) quickly followed suit. Slack's direct listing was notable because it represented the first traditional Silicon Valley-based VC-backed company to use the structure. It was also an enterprise software company, albeit one with a consumer cult following.

Combine all of these trends and mix in some prominent VCs writing about the benefits of the structure, the media picking up the story and running with it, and even the big investment banks pushing the structure—and the rest is history: Direct listings have now become the hot topic for many late-stage private technology companies considering going public.

Debunking Myths and Misconceptions

As advisors to many late-stage technology companies that are considering a direct listing, we keep hearing a number of common misconceptions. Here are the top three:

"Direct listings are a capital-raising event for the company."
No! This is one big misconception that we are still continuing to hear. A direct listing is not a capital-raising event for the company. If your company needs additional capital at the time of its IPO, a direct listing is likely not the right structure for your company. And as we discuss in "How to Prepare for a Direct Listing—Best Practices," although the U.S. Securities and Exchange Commission recently rejected an NYSE proposed rule change to allow for a company to raise capital and do a direct listing at the same time, we expect significant regulatory developments in the near future that will give companies more flexibility to pursue alternatives to a traditional IPO.

"I want to do a direct listing because there is less due diligence required."
Also no! For companies considering a direct listing, limited investment banker due diligence should not be a reason to choose a direct listing over a traditional IPO. That's because the investment banks and their legal counsel put companies through the exact same due diligence process as in a traditional IPO. They do this in order to protect themselves from liability if a court were to determine that they acted in the capacity of an underwriter. Moreover, a company and its directors and officers are subject to the same liability as in a traditional IPO, so companies are well served by going through the same stringent due diligence process, which serves to protect the company and its officers and directors from liability.

See:  Corporate venture capital deals hit new record as banks invest in fintech competitors

"The direct listing process is totally different from an IPO."
(Mostly) No! While there are certain aspects of a direct listing that differ significantly from a traditional IPO, the process for each of these transactions is actually quite similar. A company doing a direct listing still selects investment bankers (they are just called "advisors" instead of "underwriters"), holds an organizational meeting, prepares an S-1 registration statement, goes through the same lengthy SEC review and comment process, and has the same liability exposure.

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NCFA Jan 2018 resize - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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How I Raised $1 Million in 30 Days with Equity Crowdfunding

Entrepreneur | Murray Newlands | Dec 3, 2019

equity crowdfunding funding - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From FictionYou can raise a million, too. Here's how to be successful with equity crowdfunding.

There's an art to raising money for a startup. I recently joined Commerce AI as Chief Strategy Officer, and my role has two main functions: fundraising and marketing. My goal in the first 30 days was to raise a million dollars from crowdfunding. This can be a viable goal for your company as well. Here’s how.

Equity crowdfunding

Under the Jumpstart Our Business Startups (JOBS) act, there are a number of routes to crowdfunding. The starting point is a Form C round, which in essence means you can raise $1.07 million per year -- yes per year -- from non-accredited investors. This means anyone can invest over $250 at a time. This time we worked with accredited investors only but most people will start with a Form C round.

Architecting a New World: Investment Crowdfunding and Digital Assets

This model is like Kickstarter, but you give backers equity rather than a product. The equity can be a convertible note, a safe note or a fixed price round. If your goal is to raise more than $107,000, an independent CPA must review your company's financials for the past two fiscal years, or since incorporation.

Aligning the stars makes millions

You need to make sure that your startup is ready for fundraising. Smart investors on crowdfunding platforms look for a few key factors, and we had some of those.

It is all about the story. Investors want to invest in a company that is going to be a billion-dollar company. Do you have a credible path to becoming a billion-dollar company? For example, our CEO and founder had a successful previous exit. People like to back winners.

A strong team is also important. Ours is comprised of Stanford and MIT PhDs who have been working on AI technology to solve really hard problems.

Initial product/market fit is another thing investors want to see. We already had substantial revenue from major brand name customers like Unilever, Walmart, Rakuten, USPS, Chanel, Midea, Netgear, Cisco, and Coca Cola.

A sales process that’s growing that list of customers is also a big plus. We were nearly at break-even last quarter, which assured our investors that their money is safe with us.

No company can have all the boxes checked. But the more positive signals you have for investors, the better. Investors want as close to a sure thing as possible.

When fintech met crowdfunding

Creating a winning campaign

Several good equity crowdfunding platforms are available, such as StartEngine and Republic. We chose to use SeedInvest.

It’s important to create a convincing writeup and video explaining what you do and why people should invest. You should think of this as a landing that advertises your product, only you’re selling to investors rather than customers.

We focused on selling the opportunity and potential of the company, not the product. You might have an ingenious widget, but will your business become a billion-dollar company? It’s a big market out there, and investors need to be convinced that you’re going to be the winning business.

Pre-seeding the campaign

Because investors like to follow other investors, we pre-seeded a winning funding campaign. How? We had some investors with larger checks lined up to invest in the campaign. This enabled us to show strong initial traction when we launched. It also helps that crowdfunding platforms highlight companies that are gaining traction. This leads to attracting even more investors.

Getting In Early: SEC Sees Growth In Equity Crowdfunding

Always improving

Your campaign is never “done.” We kept working hard on improving our story. As a startup seeking investment, your goal is to sell your company’s potential for future growth. Getting that story absolutely right is very important. You should be practicing, thinking and brainstorming your story with as many people as possible. It should be something you’re always trying to improve.

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NCFA Jan 2018 resize - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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NOVACAP officially launches its new financial services fund

Novacap | Release | Dec 3, 2019

Novacap - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From FictionNovacap is the first private equity firm in Canada to launch a fund dedicated to financial services.

MONTREAL, Dec. 3, 2019 /PRNewswire/ - Novacap, one of Canada's leading private equity firms, announced the introduction of a new sector fund and its first closing. Novacap Financial Services I (the "Fund") gathered initial commitments of C$260 million, a strong start toward its target of C$500 million. A second group of institutional investors is expected to close in Q1 2020.

Driven by strong demand from new and existing investors, the Fund will be managed by three seasoned executives: Marcel Larochelle, as Managing Partner, as well as Rajiv Bahl and Alain Miquelon as Senior Partners. With a dedicated investment team, they will fully leverage Novacap's infrastructure and apply Novacap's proven investment methodology.

Novacap Financial Services I aims to invest in mid-market companies established in North America, with a focus on Canada, with strong growth potential.  Four segments are of particular interest: 1-specialty insurance and distribution, 2-asset and wealth management, 3-alternative lending and 4-financial infrastructure.

The Fund will make equity investments in order to support companies with their organic growth initiatives and to drive strategic acquisitions.

See:  Portag3 Ventures closes $320 million second fund focused on fintech investment

The Fund is backed by commitments from corporate and public pension funds, financial institutions, family offices and high net-worth individuals. "We are extremely pleased with the strong support received from our investors for this first close." said Mr. Marcel Larochelle, Managing Partner of Novacap Financial Services, "This is very timely, as we are currently pursuing some very attractive investment opportunities for the Fund."

"It is a historical event as we are the first private equity firm in Canada to launch a fund dedicated to financial services businesses" said Mr. Pascal Tremblay, President and CEO of Novacap, "The Financial Services fund addresses a significant need in the Canadian market that we have observed over the past few years.  I am very proud of the team that we have assembled, who made this possible."

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NCFA Jan 2018 resize - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Portag3 Ventures closes $320 million second fund focused on fintech investment

TechCrunch | Darrell Etherington | Dec 3, 2019

portage ventures - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction

Canadian venture capital firm Portag3 Ventures has closed a second fund focused on investing in fintech startups, with final commitments from institutional and strategic LPs totally $427 million CAD (around $320 million USD). The fund will focus on early-stage investments, and it’ll look to invest in companies globally, but with a particular focus on Canada, the U.S., Europe and some markets in the Asia-Pacific region.

“We’re on a mission to build global champions from a Canadian base,” Portag3 CEO Adam Felesky told TechCrunch regarding the firm’s base of operations and investment targets. “Canada has the talent, the expertise and one of the biggest markets in the world directly to our south.

All the ingredients are there, we just need more success stories — and we are on our way to getting them. Success will breed more success. In order to understand what it takes to succeed globally, you need to invest and work with the best of the best from around the world.

Many of the early fintech unicorns are based in Europe on the back of substantive, helpful policy changes. Canada needs to learn from these examples so we get the right ingredients for building a leading, vibrant ecosystem — and we slowly but surely are.”

Contributors to this new fund include Alterna Savings and Credit Union, Aviva France, BDC Capital, Caisse de dépôt et placement du Québec, CNP Assurances, The Co-operators, Eldridge Industries, Green Shield Canada and more. The list includes a lot of strategic investors, including LPs from Portag3’s first $198 million CAD ($149 million USD) close for this fund, which was announced in October 2018.

Portag3’s Fund II has already been making investments prior to this final closing, and has already put money into KOHO, Clark, Integrate.ai and startup-builder Diagram Ventures, along with 13 other startups. Its first fund invested in a number of fintech-related companies, including Clearbanc, Drop, League and Wealthsimple, as well as some companies that have already exited, including Wave, Quovo and Zensurance.

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NCFA Jan 2018 resize - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Shifting from Institutions to Retail Clients — NYSE direct listings

Future of Finance | Lex Sokolin | Dec 2, 2019

printing press - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction

A core thesis I've held for a decade now is that personal finance -- what many in the industry call "end clients" -- is the tail wagging the dog. If you are a multi-billion dollar portfolio manager at KKR, or a multi-million dollar trader at Morgan Stanley, this might not be super obvious yet. The machinations of the high finance factory, with its blinking lights and massive bonuses, still feel like the primary activity in the industry. Once upon a time, so did the whirring of a newspaper printing press. But the examples keep piling up, and there is a way to draw a line that ends in an arrow, which points the way.

Take for example, the offering of shares to investors. The New York Stock Exchange is working on making direct listings more easily available to companies that want to go public. In short, more venture backed companies have been staying private longer, the average IPO size and cost of issuance have been going up, and the public/private market off-ramp is broken. Traditionally, investment banks intermediate private companies going public by building "liquidity" in the form of a willing book of public investors. Investor types include mutual funds, hedge funds, other banks and asset managers, and ultra high net worth investors. Maybe even some single-digit millionaires, grudgingly for the bankers of course.

See: 

It's a type of permitted market manipulation, where investment bankers often price the IPO at a discount, and the IPO purchasers often get to experience a "pop" in the price. Often -- but increasingly not at all. The breakdown of this carrot is causing private companies to re-think how they go to market. And by private companies, I mean venture investors at the top of the equity captable, like SoftBank. The failures of WeWork and Uber in the public market are key data points for this mental model.

Anyway, the large stock exchanges including NYSE and NASDAQ are exploring direct listings, which both Spotify and Slack recently used. What's a direct listing? To quote the Bloomberg article -- "Under a direct listing, a company makes its shares available for trading on a stock exchange without the formalities of a traditional IPO. That means no road show, no underwriter and no offering price". This implies that there is such built-in brand-demand that the stock starts trading without needing the guarantee of an underwriter. Popular companies are willing to take the jump and freefall into the market.

Remember Initial Coin Offerings, or its 2019 cousin Initial Exchange Offerings? Put aside your presumptions about regulation and desireability of the underlying asset. A direct listing is an Initial Exchange Offering. Or perhaps, an Initial Exchange Offering is a direct listing. You package up the investment asset, find an exchange with the largest network effect (in the crypto case, most certainly Binance; in the STO case, maybe CoinList or ConsenSys Digital Securities/Codefi), and lob it over into the ecosystem. Investors should be careful not to confuse the method of offering with the quality of the underlying investment. If all the good IPOs suddenly decided to list directly, direct listings would garner premier status. If all the good IPOs decided to tokenize and list on Coinbase (properly regulated), tokenized securities would garner premier status. This lemons problem is solvable, and direct listings are potentially the first step.

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NCFA Jan 2018 resize - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Getting In Early: SEC Sees Growth In Equity Crowdfunding

Financial Advisor | Nov 20, 2019

early stage capital - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From FictionLike the small businesses it was designed to help, equity crowdfunding is still in its start-up stage. But the U.S. Securities and Exchange Commission reports that it’s rapidly growing into a viable source of financing – and a new investment option for those who want to own a piece of an early-stage company.

Equity crowdfunding allows investors to become part owners of companies by trading their investment for shares of private stock. As with traditional crowdfunding, investments usually take place through a funding portal like Kickstarter, StartEngine or Republic. Investments may also be made through a broker-dealer’s online platform.

There are 45 such portals registered with the Financial Industry Regulatory Authority (FINRA), according to the SEC, but the top three account for about two-thirds of all offerings and proceeds raised. Wealthforge lists Reality Mogul, AngelList and FundersClub as the top three platforms.

RegCF SEC update Jun 2019 1 - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction

Signs Of Success

While equity crowdfunding is still relatively small, it’s showing signs of success. Companies such as Beta Bionics, which is developing a bionic pancreas, and craft beer company Hopsters Brewery each raised $1 million in crowdfunding campaigns. Beta Bionics recently raised $63 million through Series B equity financing.

In fact, a majority of crowdfunding campaigns have been successful, according to a new analysis by the SEC, which found that the success rate for crowdfunding companies increased from 58.9% in 2017 to 63.9% in 2018.

The SEC estimates that 1,351 offerings took place between May 16, 2016 and December 31, 2018. Offerings that were completed raised an average of $208,300 and a total of $107.9 million. The number of investors participating in successful offerings increased from 77,558 in 2017 to 147,448 in 2018.

While the U.S. market for equity crowdfunding is still small, globally equity crowdfunding has raised $2.5 billion, according to Startups.com.

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US Offerings by Stage

RegCF SEC update Jun 2019 4 - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction

Types of offerings

RegCF SEC update Jun 2019 3 - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction

The potential

RegCF SEC update Jun 2019 2 - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction

Download the 59pg PDF SEC report:  'Regulation Crowdfunding - Report to the Commission (June 2019)

 


NCFA Jan 2018 resize - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From Fiction The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Where top VCs are investing in fintech?

TechCrunch | Arman Tabatabai | Nov 6, 2019

top VC fintech insights - The Rise Of Direct Listings: Understanding The Trend, Separating Fact From FictionOver the past several years, ‘fintech’ has quietly become the unsung darling of venture.

A rapidly swelling pool of new startups is taking aim at the large incumbent institutions, complex processes and outdated unfriendly interfaces that mar billion dollar financial services verticals, such as insurtech, consumer lending, personal finance, or otherwise.

In just the past summer, the startup community saw a multitude of hundred-million dollar fintech fundraises. In 2018, fintech companies were the source of close to 1,300 venture deals worth over $15 billion in North America and Europe alone according to data from Pitchbook. Over the same period, KPMG estimates that over $52 billion in investment pour into fintech initiatives globally.

See:  How to Value a Fintech Startup

With the non-stop stream of venture capital flowing into the never-ending list of spaces that fall under the ‘fintech’ umbrella, we asked 12 leading fintech VCs who work at firms that span early to growth stages to share where they see the most opportunity and how they see the market evolving over the long-term.

The participants touched on a number of key trends in the space, including rapid innovation in fintech infrastructure, fintech companies embedding themselves in specific verticals and platforms, rebundling and unbundling of financial services offerings, the rise of challenger banks and the state of fintech valuations into 2020.

Charles Birnbaum, Partner, Bessemer Venture Partners

The great ‘rebundling’ of fintech innovation is in full swing. The emerging consumer leaders in fintech — Chime, SoFi, Robinhood, Credit Karma, and Bessemer portfolio company Betterment — are moving quickly to increase their share of wallet with their valuable customers and become a one-stop-shop for people’s financial lives.

In 2020, we anticipate continued entrepreneurial activity and investor enthusiasm around the infrastructure and middleware layers within the fintech ecosystem that are enabling further rebundling and a rapid convergence of product themes and business models across the consumer fintech landscape.

Many players now look like potential challenger bank models more akin to what we have seen unfold in Europe the past few years. Within consumer fintech, we at Bessemer are more focused on demographically-specific product offerings that tap into underserved themes, whether that be the financial problems facing the aging population in the US or new models to serve the underbanked or underserved population of consumers and small businesses.

See: 

Ian Sigalow, Co-founder & Partner, Greycroft

What trends are you most excited in fintech from an investing perspective? 

I suspect that many enterprise software companies become fintech companies over time — collecting payments on behalf of customers and growing revenues as your customers grow. We have seen this trend in many industries over the past few years.

Business owners generally prefer a model that moves IT expenditures from Operating Expenses into Cost of Goods Sold, because they can increase prices and pass their entire budget onto the customer.

On the consumer side, we have already made investments in branchless banking, insurance (auto, home, health, workers comp), cross-border payments, alternative investments, loyalty cards/services, and roboadvisor services. The companies we funded are already a few years old, and I think we will have some interesting follow-on activity there over the next few years. We have been picking spots where we think we have an unfair competitive advantage.

Our fintech portfolio is also more global than other sectors we invest in. This is because there are opportunities to achieve billion dollar outcomes in fintech, even in countries that are much smaller than the United States. That is not true in many other sectors.

We have also seen trends emerge in the US and move abroad. As an example we seeded Flutterwave, which is similar to Stripe, and they have expanded across Africa. We were also the lead investor in Yeahka, which is similar to Square in China. These products are heavily localized —tin for instance Yeahka is the largest processor of QR code payments in the world, but QR code payments are not popular in the US yet.

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