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Fintech VC Funding Fueled By Mega Rounds In The Second Quarter

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Fintech startups raised $8.3 billion in the second quarter, with $100 million-plus rounds fueling the growth.

That’s according to CB Insights, the market research firm that released venture funding data for the three months ending in June. The second quarter marked the lowest amount of funding deals by venture capitalists going toward fintechs since the fourth quarter of 2016 but the highest number of $100 million or more funding rounds. 

"Fintech is maturing on a global scale as late-stage deals increase and startups raise massive mega-rounds for product development and market expansion," said Lindsay Davis, Senior Intelligence Analyst at CB Insights in a research report highlighting the results. "Though the second quarter saw a pull-back in deals, fintech will still see strong growth in the second half of this year. Regulators will continue to lower the barriers to entry as everyone from fintechs to incumbents and Big Tech compete for customers."

According to CB Insights, during the second quarter, there were 25 deals in which fintech startups raised more than $100 million, amounting to $5 billion in total funding. The mega-rounds went to established fintech players that were in their Series D or Series E round of funding. 

In May, Marqeta, the payment platform fintech, raised $250 million in a Series E round of funding, giving it a valuation of close to $2 billion. Meanwhile, in April Lemonade, the insurance fintech, raised $300 million in a round led by SoftBank. 

In terms of the number of deals, CB Insights said it dropped 22% in the second quarter compared to the first quarter and was down 23% on a year-over-year basis. Early-stage startups felt the most pain with seed, angel and Series A rounds seeing a decline of 55%, marking a five-quarter low. The decline in early-stage deals also played a role in the overall decline in fintech funding rounds during the second quarter. 

While the early stage startups had problems raising money, challenger banks were the darlings of venture capitalists during the second quarter, with the neo banks raising $649 million across 17 deals.  The first month of the third quarter is on track to see an additional $1 billion invested in these fintech banks. Year-to-date funding for this segment of fintech has already surpassed all of 2018’s $2.3 billion raised.

As of the end of June, Monzo, the UK digital bank had a valuation of about $2.5 billion, while N26 raised $170 million in July at a valuation of $3.5 billion. Valuations for challenger banks and fintechs, in general, are growing in part because startups favor tapping the private markets for capital rather than going public via an initial public offering. As of the end of the second quarter, there were 48 fintech unicorns with a combined value of $187 billion.  In the U.S. that includes Stripe, which has a valuation of $22.5 billion, Gusto with a $3.8 billion valuation and Toast which has a valuation of $2.7 billion. In the UK TransferWise now sports a $3.5 billion valuation while Revolut is valued at $1.78 billion. Klarna of Sweden is now valued at $5.5 billion. 

It's not surprising that challenger banks are garnering a lot of attention and money from VCs. CB Insights found these digital-only banks are the fastest-growing segment of fintech with the challenger banks amassing more than 30 million accounts as of the start of August. Although these banks are just starting to enter the U.S. market, Mexico may be the next battleground for fintech banks.

Despite the mega-deals during the second quarter, CB Insight found every continent saw deal activity declined in the second quarter with North America, Asia, and Africa lodging five-quarter lows. For the first time ever, India surpassed China in terms of fintech deal activity during the second quarter with 23 startups receiving funding. China fintech startups raised $375 million, slightly more than the $350 million India based fintechs raised during the second quarter, the researcher found.