The COVID Effect and Fintech Liquidity Gap

As has been said in many recent deal memos, the financial services industry is on the verge of the greatest revolution since the inception of electronic banking services.  

From my perspective, COVID-19  has accelerated this revolution by driving us closer to cashless societies. For the startup world, this has great upside implications for the long term, but spells misfortune for many in the short term.


The State Of Dealmaking Today

COVID has disrupted mergers, acquisitions, and venture funding globally. Global venture funding is down 6 percent from the first half of 2019. If you exclude an outlier in the data–a $15.2 billion round of funding for Reliance Jio–funding in the first half of 2020 is down 17 percent when compared to the first half of 2019.

These KPIs demonstrate the turbulence in the global markets, which in turn will undoubtedly create liquidity constraints in venture capital and will accelerate fintech failures. A year from now, we will be looking at COVID as the trigger event that became the primary driver for the proliferation of fiat digital currencies and the “reset” of the fintech venture landscape.  

COVID will continue to materially affect M&A activity for the next 18 months, and venture capital investors will become more selective in their choices in order to preserve cash. Experienced general partners are still reeling from the 2001 and 2008 liquidity vacuum and venture capitalists are burdened with an aging portfolio of investments and a slowdown in M&A–these variables will potentially start affecting their ability to fund deals. Founders will find themselves prodded by fund managers who want to accelerate an exit plan and sustain valuations of their portfolio even though they still have access to record amounts of liquidity. 


Dealmaking In The Future

What is on the horizon is the fear and real possibility that hundreds of fintech companies will run out of money in 2020. However, some will adapt and find partnerships that will on-ramp their solutions into ready-made channels. 

For these emerging technologies and the innovators to stay relevant, they need to apply foundational methodologies to transform financial and capital markets by: 

  1. Understanding how market structures work and fully comprehending the regulatory landscape; 
  2. Accessing ready-made channels for quick adoption; and
  3. Having the ability to tap into Series B, C and D funding sources that are outside of the venture capital mainstream.  

Someone told me a couple decades ago that if you want to have greater access to capital, you need to get closer to the money. This is why so many startups over the past three decades made the pilgrimage to Sandhill Road–the Mecca of all things venture. For fintech entrepreneurs, the prospects extend beyond Silicon Valley; they can position themselves in the line-of-site of legacy exchanges from New York to Singapore, where well-established funding ecosystems have emerged. 


Examining The Evolution Of Exchanges

The trade and asset management verticals are changing rapidly, but innovation isn’t part of the legacy exchanges’ DNA. For most legacy exchanges and brokerages, the sun is setting three times a day because they lack an existing culture of innovation. 

As Main Street investors and institutions move into varied spaces like cryptocurrencies and security tokens, these exchanges are beginning to notice that the emergence of blockchain enabled is starting to take hold and the only way they can keep up is to start eyeing acquisitions. 

Token exchanges have been part of those landscapes for the better part of the last decade. In fact, the market is oversaturated. Most of the crypto/token exchanges are all selling the same asset class and will not be able to scale because of a lack of “qualified” issuers and market focus. 

The key word here is qualified; the whole reason that the Initial Coin Offering market collapsed in 2018 was that there was no infrastructure to qualify, rate, or authenticate issuers. Only a handful of crypto exchanges are well-positioned and will remain relevant, grow organically, or be acquired in the next 24 months. Most will simply be cannibalized or fade incrementally.

Conversely, there are plenty of foundational asset utility opportunities that are just as important to issuers, exchanges and investors. Digital asset exchange infrastructure, including proof of provenance, indices, ratings and credentialing, are not yet at the forefront, but will become integral to the future of digital asset verticals. 


Development Programs Are Bridging The Gap

Of these schemes, liquidity is quite closer than you can imagine. If you want to improve your fintech startup’s chances at securing capital, finding partners, or experiencing a liquidity event, you can catapult your team into a legacy exchange’s line-of-site of by participating in some very effective, established, private company development programs that introduce participants to their networks of institutional investors and global network of clients. 

The London Stock Exchange Group has a subsidiary branded ELITE, which facilitates their private company development program. Often considered a gateway for aggressive growth companies to go public, ELITE is more about powering international connections and providing access to global growth capital, helping clarify the fundamentals of the fundraising process. From the “how to” guide to raise funds privately on ELITE’s propriety funding platform to accessing the public markets, essentially ELITE connects companies with capital to scale. 

In March 2018, eToro became the first high-profile fintech proof point of ELITE’s effectiveness as the first company to complete an equity transaction as an ELITE Club Deal. After gaining access to strategic investment capital in a streamlined and efficient environment, eToro was able to tap into a dynamic community of entrepreneurs, advisers and investors, which helped to scale the company and compete globally.  

In North America, just across the northern U.S. border, is the Toronto Stock Exchange’s TSX Venture Exchange. This private-company program has been a gateway for hundreds of private placements on the exchange. Pre-COVID, they were frequently on the road hosting startups in seminars and “lunch & learn” programs in NewCo hot spots like Austin, Chicago and Silicon Valley, creating several opportunities to finance spin-offs, startups or subsidiary companies and private companies.  

On U.S. soil is the NASDAQ Private Market, which helps facilitate controlled liquidity programs for pre-IPO companies looking for capital for both shareholders and investors. Arguably NASDAQ has consumed the lion’s share of the ever-shrinking high-profile tech IPOs and its legacy can’t be disputed. 

With long-term prospects for newer companies in the fintech space looking uncertain, programs such as these, which allow access to established and successful organizations, will be key to ensuring long-term success. 


Looking Ahead

M&A activity is not going to completely shut down in the age of COVID–instead activity will slow to a trickle and the floodgates will open once again to an innovation-hungry industry.  

Fintech’s evolution has ushered us into “the age of disintermediation” in the global financial markets. Although emerging blockchain technologies are responsible for the dawn of “digital assets” and provide the promise of transparent and seamless transactions, the legacy exchanges are very much alive and well and will still play a major role in the coming age of direct listings and the demise of the IPO. 

  • Originally published September 15, 2020, updated June 15, 2022