The fintech sector would need to raise £825m to see out the Covid-19 pandemic, KPMG research has found.
The new report, entitled Fintech Focus, estimated that fintech start-ups in the UK face around £1.5bn in annual losses, with six per cent of fintechs breaking even and 84 per cent of businesses reporting increasing losses in their last financial year.
Because of these ongoing losses, and the need for regular fundraising, almost half the sector had less than 18 months of a so-called funding runway at the time the pandemic hit, KPMG said.
For all of the fintechs in the report to achieve that 18 months of runway, the sector would need to raise approximately £825m.
The pandemic will also push out the time at which fintechs might be able to break even, creating more pressure to refine business models and adjust strategies to reduce the need for more financing, KPMG said.
“Covid-19 is sharpening the minds of the entire fintech ecosystem when thinking about what makes a thriving and sustainable sector,” said Anton Ruddenklau, global co-head of KPMG Fintech.
“For the fintech firms that are truly transformative with their business models, the path to profitability at scale is still likely to be 10 years plus, and for these firms to remain competitive they will need to be systemically important.
“Nonetheless, patient capital must be found, and now more than ever institutional investors need investment data to support their participation.”
“Raising funding is always a difficult process, even for some of the most promising fintechs, and the crisis has exacerbated the problem,” said Liam Gray, head of fintech programme at TechNation.
“Not only has capital become more challenging to raise, many that do raise have been forced to accept lower valuations. That being said, raising capital – even at a lower valuation – is still a great achievement in this climate.”
The report said that the fintech sector, estimated to be valued at $48.5bn (£38.7bn), is still providing attractive returns, particularly for early-stage investors.
As of the latest round of funding, the median internal rate of return on paper for first round investors is 71 per cent.
KPMG’s research also revealed that female founders are, for the second year running, outperforming the industry average, with only 22 per cent of female-led fintechs entering Covid-19 with less than 18 months of runway.
This is around half of the representative percentage for the sector as a whole.