VC funding into fintech grows as sector embraces latest AI and gaming trends

As a tech-focused venture capital (VC) firm, here at Telstra Ventures we pride ourselves on being across the latest start-up trends, particularly in the fintech space. However, like everyone, the COVID pandemic required the VC community to think, act, and work differently. At the same time, we have seen the effects of the pandemic spurring innovation and accelerating development across a number of emerging sectors that are attracting VC interest.

In a recent study, we examined more than 35,000 start-ups across the US that had received VC funding in an attempt to understand where new tech hubs were emerging and what sectors were flourishing.

We found that health tech start-ups had attracted the most VC interest, with the number of VC investments into the sector increasing 24% in 2020 over the previous year. It was perhaps not surprising that health tech led the way during the COVID era where there was a surge of interest in well-being, mental health and family benefits platforms.

But how did fintech start-ups fare in attracting funding during the pandemic?

Our research reveals that VC investments into fintechs grew by 11%, making it the fourth fastest-growing sector, behind health tech (up 24%), cloud, network and security (21%), and edtech (12%).

Source: “Tech’s Great Migration”, Telstra Ventures, March 2021

Tech innovation impacts industry verticals

The significant growth of VC investments throughout 2020 highlights a considerable trend – tech innovation did not slow down during this period. In fact, in many cases, it accelerated as a result of COVID-19 and the consequences of people and businesses being forced into lockdown. A study by The NPD Group found that four out of five US consumers played a video game during a six-month period last year, with total time spent on gaming up 26%.

This innovation is bleeding between sectors too. Take, for example, the impact on gaming tech on fintech and vice versa. Both gaming and fintech companies tend to be led by experimental, forward-thinking leaders, and so they both naturally find themselves at the cutting edge of innovation in terms of exploring new concepts, ideas and technologies.

Gaming companies use a lot of flavours of artificial intelligence (AI) to constantly improve the user experience, leveraging the volumes of data that they collect. The same can be said for fintechs: they sit on a lot of transactional data that companies can use to understand their customers. For example, in-game purchases are a huge part of gaming: virtual skins on Fortnite or the ability to “tip” creators on Twitch and YouTube – all of this is being enabled via fintechs involved in payments.

Each transaction adds up, and a million small transactions creates real revenue. These gaming companies need the underlying fintech infrastructure in place to handle those volumes. If consumers have a bad experience – a slight delay in payments, or some other glitch in the experience – that can significantly impact their revenues.

The influence works the other way around too: fintechs are also experimenting with concepts such as online “tipping” and we’re also seeing consumer fintech companies such as Robinhood adopting gaming techniques in areas such as user acquisition, user retention and monetisation. Fintechs are also starting to hire more gaming-focused product managers to embed the “gaming DNA” into how they offer their services to their customers.

The rise of insurtech

Another fintech space taking advantage of AI is insurtech. Brokers are very interested in AI and machine learning (ML) tools that help calculate and price risk more accurately, avoiding the need to make large uneducated assumptions about a class of risk – instead accessing very granular insights that help price insurance at a much more targeted level.

An example in the current Telstra Ventures portfolio is Corvus Insurance. AI allows it to analyse a specific company’s cyber-risk profile using AI, processing data from both the company and various cyber-risk and insurance risk sources – and price a policy specific to that client, all in a matter of seconds.

But use of AI alone isn’t enough of its own – it must be a means to an end. When we’re looking at a potential investment in this space, the company in question needs to be offering AI plus something for customers or be solving a problem that lends itself to AI.

For VCs, regardless of the technology being used, we are ultimately looking for extraordinary entrepreneurs and companies that are addressing problems in large existing markets or unlocking completely new markets.

A new era of innovative fintechs are doing both today.