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Venture Capital Gives Wealth Management Startups the Cold Shoulder – Again

Deal volume trailed other fintech segments in the second quarter.

Venture capital firms are not as enthusiastic about wealth management startups, if the number of deals, and the amount of money they are willing to invest, are indications. But it might just be a break, not a breakup.

Fintech companies have broadly done fewer deals and raised slightly less money this year. Companies in North America and Europe raised $6.3 billion in venture capital funding through 360 deals in the first quarter, down from $6.6 billion and 424 deals a year earlier. In the first half of 2020, the total value of deals was $12.9 billion, also down from $13.6 billion raised in the first half of last year, according to PitchBook, a data company focused on venture capital, private equity, and mergers and acquisitions.

But 2020 has hardly been a typical year. The Covid-19 pandemic has infected over 5.7 million people and killed at least 177,547 in the U.S., according to The New York Times database tracking global confirmed cases. Millions of Americans are either unemployed or still working from home. The stock market fell into the fastest-ever bear market and has since recovered to new highs, but the economy is badly damaged.

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Considering the above, fintech companies are doing okay. “As the COVID-19 pandemic appears likely to spark another recession, the traditional financial industry as well as newer fintech startups appear well prepared to weather this crisis,” Robert Le, a senior analyst who covers Emerging Technology at PitchBook, wrote in the most recent quarterly Emerging Tech Research report.

However, the wealthtech segment — which includes companies like Robinhood, Facet Wealth, Vestwell, Cadre, Betterment, and others — continued to lag behind the broader fintech space in the second quarter.

After a record $2.1 billion was invested in 163 deals in 2019, deal volume plummeted and companies raised a meager sum of money in the first quarter: There were only 20 deals and the total amount raised was down 75% year-over-year to $178 million.

The second quarter was better than the first. Wealthtech companies did more deals with venture capital firms and they raised more money, narrowing a large gap between this year and last. In the first half of 2020, wealthtech companies did 51 deals worth $741 million, a total value down 34% year-over-year.

But this year’s venture capital investments in wealthtech, relative to fintech more broadly, are not an indication of a change in attitude about wealth management, according to observers.

“Yes, fintech VC activity is down a bit but that was from record levels. From what I see, while the pandemic slowed deals down a bit, demand is still strong and I wouldn't underestimate how much dry powder is out there both in terms of uninvested VC funds that have already been raised and ongoing fundraising,” Gavin Spitzner, the president of Wealth Consulting Partners, a management consultant to banks, wealth managers, and asset managers, told RIA Intel.

Business-to-business fintech companies, including those catering to wealth managers, are “certainly a crowded bet,” according to Spitzner. But he has seen “continued strong interest from the patient capital crowd in both direct-to-consumer personal finance fintech as well as hybrid models combining humans with technology.”

Spitzner is also a limited partner at Mendoza Ventures, a pre-seed venture capital firm in Boston focused on artificial intelligence, fintech, and cybersecurity startups.

It’s also possible that some wealthtech entrepreneurs have begun building something new but are bootstrapping their new companies, or raised capital from places outside of venture capital funds.

PitchBook’s Le is also bullish on the wealthtech space.

“Although the high market volatility has led to a flock to digital trading apps and increased trading, we have observed an overall decrease in fund flows (lower AUM). We believe investors are still sorting out the impact of a downturn on companies in this space. However, over the long term, we expect increased investment into this segment as retail investors and those looking to save for retirement continue to rely on new technologies to achieve their financial goals.”

One of the more notable fund raises this year was decided days after the March market collapse, when Sequoia Capital led a $14.5 million Series A round of funding for Vise, an AI-driven portfolio management software for financial advisors. 

More recently, Republic Capital Group, a boutique investment bank that primarily advises wealth and asset managers, made its first-ever investment in a fintech company called Creativemass. The company says its flagship product, WealthConnect, is capable of replacing a client relationship management or CRM system, portfolio management software, financial planning, risk and compliance, and other tools.

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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