- 2020 has been a big year for fintech, with consumers turning to digitally-native apps and services to manage their finances.
- And there's been no shortage of funding to fuel fintechs' growth.
- From M&A and public listings to competitive private funding rounds, fintech investors are optimistic about the exit opportunities that await their portfolio companies in 2021.
- Visit Business Insider's homepage for more stories.
Fintechs have come of age in 2020, seeing massive growth and adoption.
There's also no shortage of funding. Private funding has surged with a record number of mega-rounds — $100 million and above — this year, according to a recent report from CBInsights. Some fintechs, like Affirm and Marqeta, are even gearing up for IPOs.
And investors don't see the market cooling down any time soon.
"This is the hottest market I've ever been in, and I'm five-and-a-half years into my venture career," Mark Goldberg, a partner at Index Ventures, told Insider.
See more: Embedded finance and the rise of finfluencers: 4 fintech investors highlight the hottest trends to watch in 2021
Early-stage fintechs have raised back-to-back rounds in a matter of months, and incumbents are buying up fintechs for billions of dollars.
And there's plenty of optimism among investors when it comes to their portfolio companies' exit options in 2021.
"We're very excited for some of our more mature companies for the exit environment that they'll be seeing," said Jay Ganatra, partner at PayPal Ventures, whose portfolio companies include personal finance app Acorns and earned wage access startup Even.
2021 will be a busy year for M&A and IPOs
This year was a big one for fintech deals. Intuit bought Credit Karma for $8.1 billion. Amex plans to acquire Kabbage for a reported $850 million. Mastercard purchased Finicity for $825 million. And Visa agreed to buy Plaid for $5.3 billion, though that deal is currently under review by the DOJ.
Investors expect that this wave of M&A will continue, as will exits into public markets, in the new year.
"For at least the first half of 2021, and as far out as maybe we can see from an interest-rate environment and things like that, I suspect it will continue to be very active," Ganatra said.
Embedding payments and financial services into historically non-financial apps has proven a sticky trend in fintech. And that makes fintechs attractive to incumbents and large tech companies.
"Viewing payments and financial services as a really attractive revenue and margin generator and engagement driver, I think all of those things are making companies in this space more attractive," Ganatra said.
See more: Execs from Plaid and Yodlee explain how new data-sharing rules will dictate the future of how banks and fintechs work together
And public markets are warming to more mature fintechs. While fintechs have been mostly absent from the big-name tech IPOs of 2020, that's expected to change in 2021.
Affirm has publicly filed paperwork to IPO, and, despite a slight delay, is expected to go public in early 2021. Meanwhile, Marqeta and Robinhood have both reportedly hired bankers to underwrite their public debuts.
In a hot market with low interest rates, the low cost of capital is attractive for fintechs looking to continue building out their businesses.
"Companies are going public again at a rapid pace," Ashley Paston, an investor at Bain Capital Ventures, told Insider. "It's really a function of the growth capital available to companies, and the openness of capital markets towards tech."
Index Ventures' Goldberg said he expected capital markets to tighten earlier this year, making 2020 a year of reckoning for fintechs, especially those in lending. But that wasn't the case.
"Here we are at the end of 2020 with Affirm sitting on the IPO one-yard line. That is a total shock to me," Goldberg said. "I thought this was really going to be a reckoning year in fintech."
Read more: Airbnb's VCs congratulate the company, and themselves, on its IPO and $100 billion market value: 'You had to squint very hard to see the promised land.'
In fact, 2020's shift to digital proved a massive tailwind for fintechs, Goldberg added. So players in both the private and public markets have been eager to fund them.
"With interest rates going to zero and risk tolerance never really narrowing, people were really hungry for yield this year," Goldberg said. "They were willing to lend to fintechs in a way that I think propelled the growth."
Paston also noted that today, private equity firms that historically would have shied away from unprofitable fintechs, are now showing interest in fintech as well.
"A lot of private equity companies as well, who five or 10 years ago, may not have engaged with a company that was burning money, as an example, are now leaning in a lot more," Paston said. "So you have this wave of capital coming into the market. As a result, valuations are being pushed up as people place more value on really impressive founders and great companies."
There's plenty of VC cash to go around
Despite uncertain macroeconomic factors early in the year, there was no shortage of VC funding in 2020. There were a record 97 mega-rounds (above $100 million) for more mature fintechs, according to CB Insights.
Well-known consumer fintechs like Chime and Klarna each raised hundreds of millions. Robinhood alone raised four times this year.
And for early-stage companies, funding timelines accelerated, with fintechs raising back-to-back rounds in a matter of months.
"If a company with a great team and great idea got funded for their seed round, historically you'd probably wait 6, 12, or 18 months for the next round of Series A financing. That compressed to like six weeks this summer," Goldberg said.
Early-stage fintechs like Mantl, M1, Ramp, and Step, for example, all raised multiple times this year.
"There's kind of a structural imbalance where there's just a lot of money in the asset class looking to support technology companies, of which fintech is a beneficiary," Goldberg said. "There's probably never been a better time to start a company because there's just so much money on the sidelines waiting to go to work."
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