VCs push 'frothy' fintech valuations
Valuations of fintech companies have become "frothy", detached from the underlying business performance, according to Andy Stewart, co-founder at fintech-focused investment company Motive Partners. He attributes the frothy valuations to the success of previous fintech firms and the amount of capital that's invested in the sector. Rather than funding start-ups with a big block of capital, he suggests venture capital firms could be more creative with their investment by layering capital over time, adding that opportunities for investors can be found in start-ups' later transformation stages, or in buyout transactions.
Paul Mattes from Trier presents his project titled 'Development of a universal artificial intelligence for board games' at the 52nd 'Jugend forscht' ('Youth research') competition in Rhineland-Palatinate in Ludwigshafen, Germany, 5 April 2017. Uwe Anspach/DPA/PA Images

LONDON — Valuations of financial technology companies are "frothy," according to one of the cofounder of a new fintech-focused investment company.

Andy Stewart, a managing partner at Motive Partners, said at the International Fintech conference in London last week: "I would call valuations right now frothy in general... tech generally is frothy."

A frothy market is one where valuations become detached from the underlining performance of a business. Stewart said: "I think that's a result of the success of many of the financial technology companies out there, I think it's a result of the amount of capital that's flown in, if you look at the last two years you've had record amounts of capital flowing into financial technology."

Stewart complained that many companies were now latching on to buzzwords that were inflating their value. He said: "One thing that people have to be careful of is buzzwords. Anything that has machine learning in it or blockchain in it, the valuation goes up, 2, 3, 4, 5x. We've seen companies come back to us multiple times and originally it's an AML/KYC engine which looks pretty interesting. Then it turns out to be AML/KYC [anti-money laundering/know your customer] engine powered by machine learning and using blockchain, and it's a much more valuable company. "

Motive is a relatively new player in the market, announcing itself at the start of the year. The new investment company, which has offices in London and New York, is aiming to raise a $1 billion. It is staffed by veterans of the financial technology and investment community — Stewart worked at BlackRock prior to joining.

While Stewart thinks a lot of companies may be overpriced at the moment, that doesn't mean there aren't good deals to be found.

He said at last week's conference: "I do think there continue to be investment opportunities, you just have to look a little harder for it, you have to stick to your process.

"In particular, venture seems particularly frothy to me but there seems to be quite a bit more of an opportunity at a later stage, transformational or buyout transactions.

"We've been looking at companies that need help, we call them stressed or distressed, that need help with technology or with their business plan, operating, just getting deeper into the operating mode with companies. As I said, being more creative with the transaction — layering capital overtime rather than just a big block of capital and waiting to see what happens."