The following are some highlights from the UK Fintech Focus report produced for KPMG and Google Cloud in July 2020, based on our ongoing research programme into UK fintech performance, financing and valuation. The data is up-to-date as of March 2020.

Most fintech startups are still struggling to achieve profitability
Although the failure rate of companies in our sample is relatively low with just 4 out of 100 companies going into administration, only 6% are at least breaking even and 84% of the continuing businesses reported increasing losses in their last financial year. Even companies more than 5 years old are struggling to reach profitability with 79% of this group increasing losses in their last financial year. Extrapolating from our sample to the universe of all fintech start-ups since 2010, we estimate the annual losses for the sector in 2019 were in the region of £1.5 billion.

Equity financing has continued to be available for loss making companies
The more positive news is that equity financing continues to be available even for loss making companies that have been operating several years although, as companies get older, increases in valuation start to get smaller and investor returns on paper decline. The headline figures on investment are, however, somewhat distorted by the large equity financing rounds of a few companies, with 5% of the sample representing 70% of total equity financing in the past 12 months.

Investor returns on paper are still high but were probably falling even before the crisis
The median internal rate of return on paper for first round investors as of the latest round of funding for each company is 71%. These returns typically decline as a company goes through multiple rounds of funding and if we adjust for this factor we find that the internal rate of return at companies raising funds in the past 12 months is 18% below what we would have expected. This suggests that valuations have been falling slightly.

Some notable differences between Financial Services and Technology/Processing businesses
The primary difference between these two types of fintech is that the companies providing financial services tend to be the ones raising the larger amounts of funding (e.g. Revolut and Monzo). Some of these companies are also generating relatively high revenues given their stage of development but at the same time incurring relatively high annual losses. We observe little difference in terms of investor returns to date between the sectors. The Paytech vertical, which includes both types of fintech, does stand out from the other verticals in terms of investor returns which may be related to the successful exits taking place elsewhere in this business line.

The impact of COVID on short term performance should be manageable
As most of the startups in our sample have relatively low revenues and are loss making anyway, a short-term decline in revenues, if compensated for with some modest cost savings, should have limited impact on profitability. However, the crisis will push out the time at which businesses might be able to get to break even and hence there will be pressure to refine business models and adjust strategies to reduce the need for further financing.

Many companies need financing to fill funding gaps
Going into the crisis, we estimate that just over 50% of companies in the sector had more than 18 months of funding runway which will help them get through without having to raise funds earlier than planned. However, the remainder had an estimated funding gap of £825 million if an 18 month funding runway is to be achieved and this will need to be filled relatively quickly for many. Existing investors are likely to step up where they are confident of the business model viability, and this funding could be enhanced by government support schemes.