Start-up funding nosedives in Covid-19 crisis but fintechs to flourish

New forecast indicates as much as $84 billion in funding at risk as crisis dominates

VC deals in China have contracted by at least 50 percentage points since the start of the crisis. Photograph: iStock

VC deals in China have contracted by at least 50 percentage points since the start of the crisis. Photograph: iStock

 

Up to $84 billion (€ 76.9 billion) in global venture capital investments for start-ups could be at risk if the Covid-19 crisis continues throughout 2020, a new study forecasts.

The research, which has been undertaken by Startup Genome, suggests that if the rest of the world follows the Chinese trend - where VC deals have contracted by at least 50 percentage points since the start of the crisis - this would result in a $28 (€ 25 billion) billion global decline in investments for start-ups over just two months.

If the drop in investments continues much further beyond two months and the Covid-19 shocks trigger a long lasting economic contraction then Startup Genome predicts the total drops in global VC investments will be between 21.6 and 29.3 per cent over twelve months - the equivalent of a decline of up to $86.4 billion (€ 79 billion) in investments.

Crisis mode

The forecast comes as Finch Capital, an early-stage VC, which last year announced plans to invest up to € 20 million in Irish start-ups, issued a new report in which it suggested that while fintechs will suffer during the Covid-19, they will likely rebound strongly.

Mike Brennan, principal at Finch in Dublin said fintechs here are in a particularly good position to bounce back from the current challenges.

“Ireland is well placed to capitalise on a ‘digital-only’ post-crisis era as it has become a European hub for AI, IoT and other fintech enabling companies. These are companies who can deliver a new class of software solution that will help power the financial services industry in the future as companies turn to tech to accelerate digital transformation and manage risk,” he said.

According to the study, “crisis mode” will continue until at least the third quarter, and this will be followed by a recovery that will likely take between 12 to 18 months.

Finch forecasts that digital-only will become the new industry norm in financial service following the crisis, greatly accelerating a trend which started in the last decade.

It predicts that this continued shift will trigger a “big pocket” battle between incumbents and challengers to win new online customers with traditional institutions eventually embracing fintechs, rather than trying to achieve digital transformation in-house.

Fewer flotations

Finch predicts that in a post-Covid-19 environment, there will be a pull-back of corporate VC-led investments for fintechs. It does however predict increased M&A and trade sales in $250 million companies as fewer market flotations take place.

The VC partnered with Enterprise Ireland for a fintech focused fund last year and has since made a number of investments, including leading a recent € 5 million funding round for artificial intelligence (AI) risk intelligence provider Aylien.

The start-up’s founder Parsa Ghaffari said the current crisis had shown the importance of using technology such as AI for financial institutions.

“Many executives in major financial institutions have become aware of Covid-19 too late, which has had a knock-on effect on how quickly they can react to the pandemic, resulting in increased losses. This is an area where AI targeted at detecting emerging risk can excel,” he said.