Venture capital firms were hesitant to invest in wealth management startups earlier this year, as the immediate impact of the Covid-19 pandemic made it impossible to gauge the duration of the health crisis and the extent of economic damage.
But general partners are back in action and have already made 2020 an unprecedented year for yet another reason.
After venture capital firms invested a record $2.3 billion in wealth management startups through 163 deals in 2019, investments and deal volume plummeted in the first half of this year.
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In the first quarter, there were only 20 deals and a total of $178 million raised, down 75% year-over-year, according to PitchBook, a data company focused on venture capital, private equity, and mergers and acquisitions. The second quarter wasn’t much better. Through the first half of 2020, venture capital firms made 51 deals with so-called “wealthtech” companies and invested a total of $741 million, a total value down 34% year-over-year.
Observers didn’t expect the lull in deal activity would last and they were right.
Venture capital firms invested hundreds of millions of dollars in the third quarter, bringing the total for the year to approximately $2.4 billion and setting an annual record with a full quarter to go. Much of the money invested went to the trading platform Robinhood, which raised a $600 million Series F round of funding in July and another $600 million Series G round in September.
There were 51 deals between VCs and wealth management startups in the third quarter, doubling the total so far this year to 102. The total number of deals this year still trails the 169 deals in 2019, according to PitchBook.
The circumstances forced by the pandemic have accelerated investors’ adoption of digital trading and wealth management services, such as Robinhood and others. As a result, the opportunity for wealthtech startups has widened as traditional wealth managers modernize and improve. Late-stage vaccine trials have appeared to be remarkably effective, but even if the most optimistic forecasts become reality, the pandemic will linger well into next year. Legacy wealth managers are realizing the pandemic is going to impact their businesses for the coming months and likely indefinitely.
“One driver of growth appears to be pandemic-driven market volatility attracting new day-traders to digital stock trading apps. The pandemic may also be driving consumers toward digital solutions as opposed to face-to-face wealth advisors,” Robert Le, a senior analyst who covers Emerging Technology at PitchBook, wrote in the most recent quarterly Fintech report.
Facet Wealth, a Baltimore-based technology company that connects investors with financial advisors, has doubled its growth rate during the Covid-19 pandemic and raised $25 million in funding in September. Another company, YieldX, a Miami-based portfolio management software company that helps financial advisors source, allocate, and trade fixed-income securities, raised another $5 million in seed funding during the third quarter.
“We believe long-term fundamental drivers exist for providers in this space. Although this puts legacy wealth management incumbents at risk of asset migration, it presents a massive opportunity for fintech companies to attract new assets from customers who expect digital, user-centric, and multichannel solutions to manage their assets,” Le wrote in the latest quarterly report.
Over the past five years, through 2019, wealthtech startups raised more than $5.8 billion across North America and Europe. Although RIAs are the customers of many wealthtech startups, they are rarely making those investments on behalf of clients.
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.