New fintech start-ups 'game changers' for SME financing – report

The emergence of financial technologies (FinTech) has become a game changer for SMEs due to the sector's innovative tailor-made products, especially when lending from traditional banks is difficult, according to a report released by Al Masah Capital Management, an alternative asset management and advisory firm.

FinTech companies, with their unique products such as marketplace lending, crowdfunding, or tech-enabled payments, have attracted significant interest from VCs, where global VC Investments grew from $1.8 billion to $22.3 billion in the last five years!

The report added that global banks were catching up with it after a 'wait and watch' period during the initial stages, with many of them now allocating funds towards FinTech, primarily aimed at making acquisitions, setting up venture funds, and initiating start-up programmes to incubate FinTech.

Over 80 percent of the funds invested by banks have gone towards three categories – start up programmes to incubate FinTech (43 percent), setting up venture funds (20 percent), and partnering with FinTech companies (20 percent).

The report further stated that the MENA FinTech industry was still in its nascent stage.

Al Masah’s report also stated that venture capital (VC) has emerged as an important source of finance for SMEs, especially for starting a business and its expansion across the globe.

2015 was a record year for venture capital backed funding, both in terms of volume and value. The total value of investment reached $129.5bn in 2015 compared to $90.5 bn in 2014, an increase of 43.1 percent.

The CAGR during the past four years was 27.6 percent in total value, while it was around 10 percent in terms of volume. The sequential analysis of investments by VC indicates that the deal value started declining in the last quarters of 2015, which can be attributed to the changing market environment on the back of concerns of decelerating growth in leading economies.

More than 50 percent of total investments were made at seed, angel and Series A level, while the proportion of later stage investment continued to remain very low compared to the overall value of investments. This can be attributed to the exponential rise in valuations of these technology based companies, which might have made new VC investors reluctant, especially in a slowing global economy.

Internet and mobile based companies continued to attract two-thirds of all VC-backed deals. Healthcare, software and consumer products and services remained range bound during 2015 as the focus has clearly shifted towards technology-based companies.

The report stated that the region's VC market was faced with several challenges impeding growth, such as the lack of established success stories; a number of barriers for potential entrepreneurs to take the plunge; lack of deal flow and shortage of early stage opportunities; structural challenges such as foreign ownership limitations and tax implications; limited number of 'high-value' regional opportunities with quality/proven management teams; and the lack of knowledge of the VC industry in general.