AN EMPIRICAL ANALYSIS BASED ON STUDIES OF FUNDING STRUCTURE OF 50 FINTECH COMPANIES

Chuanen (Joy) Sun Mentor: Shu (Carrie) Shang

California State Polytechnic University, Pomona

Abstract

Crowdfunding is a collaborative process of a group of people who use their money in common to support efforts of business organizations using sites and online sources. As a disruptive force of the post-financial crisis banking sectors, the world’s leading fintech are increasingly using to cement and enhance their businesses. Some theories suggest the low-interest nature of crowdfunding minimize risks of and incentivizes higher returns. In this paper, by statistically analyzing business models of top 50 Fintech companies with biggest revenue amounts, the relationship between fintech companies and funding process will be better identified. Moreover, this paper further examines each Fintech sector for consumers and explores the correlation between targeted consumer groups and Fintech funding models. By using a simple regression analysis, the purpose of this paper is to better clarify the intertwined relationship among Fintech business models, funding sources, and revenues.

Keywords: Fintech, Crowdfunding, , Initial Coin Offerings.

Introduction

The growth of (fintech) has mainly driven by the 2008 Financial

Crisis and technology advancements. In 2008, the Lehman Brother crisis developed a lack of trust in the banking industry. Therefore, many fintech companies began to generate with more regulations in supervision and consumer protections. In addition, series of technologies such as machine learning, , big data, blockchain, and have made people’s lives more convenient with online banking and mobile payment services. Many banks are using AI to get better, real-time understands of their markets and operational risks. The unprecedented rise of fintech has made cryptocurrency and P2P lending possible which enabled companies to raise funds through initial coin offering and digital crowdfunding. Since most fintech companies are recent start-ups, little is known about their own funding sources. As a result, this research will classify and investigate various funding sources. By focusing on a list of

50 most innovative Fintech companies from Forbes 2019 and each of their business model and funding source, this paper will present how fintech start-ups raise funds.

Funding Sources

Venture capital funding is usually for start-up companies with little trading history and their key assets are not tangible.1 An initial investment by a venture capital fund is called a

"series A investment" where the fund seeks a minority stake in the company and receives preferred shares in the company, as well as additional protections under an investment agreement.2 Venture capitalists are most likely to put their money into firms with high potentials.

They would then possess a bundle a right to govern the corporation, along with residual claims

1Funding your FinTech. (2016, September). Retrieved from TalorWessing: https://www.taylorwessing.com/download/article- funding-your-fintech.html 2 See id

on its assets in proportion to the number of shares they own. The company then could charge its customers, pay its employees and distribute the leftovers to its shareholders.

Traditional capital markets require business owners to contractually divest themselves of various rights over their corporation’s assets. 3 In contrast, the ICO method can leave economic ownership and legal control unencumbered.4 Traditional capital-market transactions are heavily mediated by laws, regulations, contracts, and social norms. 5ICO transactions augment, and perhaps replace, those mediators by embedding controls within the smart contracts through which rules function.6

Angel investment, also known as seed funding or angel funding, refer to funding below

$1 million. 7 For this reason, seed rounds for high-tech startups usually do not see angel rounds since large VCs (venture capital firms) tend to offer capital well into the millions of dollars to promising high-tech firms. A company will hit the Series A stage when VC funding falls between roughly $2 million to $10 million. 8

Crowdfunding is a form of fundraising where groups of people make typically small individual contributions through Internet platforms, to support a particular goal. 9 It could be

3 See, e.g., Ivo Welch, Corporate Finance 4–5 (4th ed. 2017) (discussing tradeoffs between various contractual methods of financing). 4 Balaji S. Srinivasan, Thoughts on Tokens, Earn.com (May 27, 2017), https://news.earn.com/thoughts-on-tokens-436109aabcbe 5 See, e.g., David Singh Grewal, Laws of Capitalism, 128 Harv. L. Rev. 626, 652 (2014) (reviewing Thomas Piketty, Capital in the Twenty-First Century (2014)) (“Capitalism is fundamentally a legal ordering: the bargains at the heart of capitalism are products of law.”); Katherina Pistor, A Legal Theory of Finance, 41 J. Comp. Econ. 315, 315 (2013) (“[L]aw and finance are locked into a dynamic process in which the rules that establish the game are continuously challenged by new contractual devices, which in turn seek legal vindication.”). 6 See, e.g., Julie E. Cohen, Pervasively Distributed Copyright Enforcement, 95 Geo. L.J. 1, 2 (2006) (discussing this in the context of copyright enforcement). 7 What's the Difference Between Angel, Series A and B Rounds of Funding? (n.d.). Retrieved from LawTrades: https://www.lawtrades.com/answers/difference-between-angel-series-funding/ 8 See id. 9 Schwienbacher A., and Larralde B., 2010. “Crowdfunding of small entrepreneurial ventures” in D.J. Cumming, ed. The Oxford Handbook of Entrepreneurial Finance. Oxford: Oxford University Press

categorized as donation-based, reward-based, lending-based or equity funding. 10 Historically, crowdfunding has evolved from a way to finance creative projects, which has the potential to dramatically change the venture capital ecosystem. 11 Crowdfunding makes it possible for early- stage start-up companies to raise ‘venture capital’ from a large group of individuals, sidestepping the traditional fundraising process that includes lengthy due diligence periods and tough negotiations over the pre-money valuation and contractual terms. 12

Growth equity is somewhere between venture capital and . With a company’s revenue range from $5 to $50 million. 13 In the U.S, recent examples of growth equity investment in Fintech include DST Global’s lead investment into Chime Bank,

Goldman Sachs Principal Strategic ’ lead investment into Nav Technologies, and Edison Partners’ lead investment into YieldStreet.14

Methology and Data

This research is based on the Forbes 2019 of 50 most innovative fintech list. We used fintech companies’s funding sources as dependent variable. Other factors such as fintech industrial sectors, business revenue, founding years and geographical locations as independent variables. According to the

Forbes 50 most inovotive fintech lists, companies are most companies are established after 2008. Due to

10 Adhami, Saman and Gianfrate, Gianfranco and Johan, Sofia A., Risks and Returns in Crowdlending (March 3, 2019). https://ssrn.com/abstract=3345874 11Fenwick, Mark and McCahery, Joseph A. and Vermeulen, Erik P.M., Fintech and the Financing of Entrepreneurs: From Crowdfunding to Marketplace Lending (September 12, 2017). TILEC Discussion Paper No. 2017-25; ECGI - Law Working Paper No. 369/2017; Lex Research Topics in Corporate Law & Economics Working Paper No.20173. http://dx.doi.org/10.2139/ssrn.2967891

12See id. 13What's the Difference Between Angel, Series A and B Rounds of Funding? (n.d.). Retrieved from LawTrades: https://www.lawtrades.com/answers/difference-between-angel-series-funding/ 14Cardenas, J. (2019, April 12). Growth Private Equity Investment in the Fintech Sector. Retrieved from American Bar Association: https://businesslawtoday.org/2019/04/growth-private-equity-investment-fintech-sector/#_edn1

the different regulations in each state, most companies are located as it is displayed in figure 1.2. Out of six different fintech sectors, figure 1.3 illustates that payment and personal finance sectors funded the most money. Some prestigeous companies in these sectors are Chime, Brexm Plaid and .

Figure 1.1:

Figure 1.2:

Figure 1.3:

Figure 1.4:

Acorns 257 M Irvine, CA PayPal, NBCUniversal, BlackRock (VC) Addepar 240 M Mountain 8VC, Valor Equity Partners (Last stage venture, PE- View, CA Secondary Market) Affirm 450 M SF, CA Founders Fund, GIC, , Lightspeed Venture Partners, Spark Capital, Thrive Capital. (Debt financing, VC) Axoni 59 M NY, NY Citi, Goldman Sachs, JP Morgan, NYCA, Andreessen Horowitz (VC) Ayasdi 106 M Menlo Park , Khosla Ventures, Citi Ventures (VC) CA Behavox 15 M NY, NY Index Ventures, Hoxton Ventures, Citigroup (VC) Betterment 275 M NY, NY Kinnevik, Bessemer Venture Partners, Menlo Ventures Bitfury 150 M Amsterdam, (VC) Netherlands Blend 160 M SF, CA (VC) Bolt 20 M SF, CA Founders Fund, (VC) Brex 315 M SF, CA Y Combinator Continuity (Debt financing), Kleiner Perkins (VC) DST Global Cadre 133 M NY, NY Silver Lake, CapitalG, Tiger Global Management Andreessen Horowitz (VC), Ford Foundation, Goldman Sachs (Series C) Carta 148 M Palo Alto, Spark Capital, Tribe Capital, Meritech (VC) CA Chime 105 M SF, CA DST Global (PE), (PE), ICONIQ. (Series E) Circle 246 M , MA IDG Capital, Bitmain, Breyer Capital, Goldman Sachs (VC, Secondary Market) 525 M SF, CA Andreessen Horowitz, Tiger Global Management, (VC, Secondary Market) Credit Karma 869 M SF, CA Silver Lake, CapitalG (PE), Tiger Global

Management. (Secondary Market) Cross River 128 M Fort Lee, NJ KKR, Andreessen Horowitz, CreditEase, LionTree Partners (VC) Digital 110 M Nashville, Goldman Sachs, BNP, Nasdaq (VC) Reasoning Tennessee Earnin 190 M Palo Alto, Ribbit Capital, Matrix Partners, Andreessen Horowitz, DST CA Global (VC) Enigma 130 M NY, NY New Enterprise Associates, Two Sigma Ventures, American Express (VC) Even 51 M Oakland, Khosla Ventures, Valar Ventures (VC) CA Flywire 142 M Boston, MA Ventures, Fidelity’s F-Prime Capital, Spark Capital (VC) Forter 100 M NY, NY Sequoia Capital, Scale Venture Partners, March Capital (VC) Fundrise 59 M Washington, Renren, Guggenheim Partners. (Equity Crowdfunding) US Gemini NY, NY Guideline 59 M San Mateo, Tiger Global Management, Felicis Ventures, Propel Venture CA Partners and Lerer Hippeau (VC) iCapital 80 M NY, NY Credit Suisse, BlackRock, Morgan Stanley, UBS, BNY Mellon Network (Corporate round) (VC) IEX Group 100 M NY, NY Franklin Templeton, Spark Capital (VC) Kabbage 489 M Atlanta, SoftBank Vision Fund, BlueRun Ventures, Mohr Davidow Georgia Ventures (Debt Financing, VC) Lemonade 180 M NY, NY SoftBank, Allianz, Sequoia and Aleph （Secondary market） LendingHome 166 M SF, CA Foundation Capital, Ribbit Capital (VC) Marqeta 116 M Oakland, Visa, 83 North, Coatue Management (VC) CA Nova Credit 20 M SF, CA (VC) Opendoor 1000 SF, CA Khosla Ventures, SoftBank, General Atlantic (VC) M Personal 225 M Redwood IGM Financial (VC) Capital City, CA Plaid 310 M SF, CA Andreessen Horowitz, Kleiner Perkins, NEA (VC) Poynt 132 M Palo Alto, Matrix partners (PE), Oak HC/FT, GV (VC), (Secondary CA Market) Remitly 175 M Seattle, Naspers' PayU, Bezos Expeditions, Stripes Group (VC) Washington Ripple 94 M SF, CA Accenture, Andreessen Horowitz, Ventures (VC) 539 M Menlo Park, NEA, Index, Thrive Capital, Sequoia, Kleiner Perkins (VC) CA Roofstock 75 M Oakland, , Lightspeed Venture Partners, SVB CA Capital (VC) Root 178 M Columbus, Coatue, DST Global, Tiger Global Management (VC) Ohio Stash 117 M NY, NY Breyer Capital, Coatue Management, Union Square Ventures (VC) Stripe 685 M SF, CA Sequoia Capital, General Catalyst, Visa (VC) Symphony 300 M NY, NY (VC)

Tala 105 M Santa RPS Ventures, IVP, Revolution Growth (VC) Monica, CA Toast 248 M Boston, MA CV, Tiger Global Management, Bessemer Venture Partners (VC) Tradeshift 400 M SF, CA Goldman Sachs, Public Sector Pension Investment Board, HSBC (VC) TransferWise 397 M , Sir Richard Branson, IVP, Andreessen Horowitz (VC) United (Secondary Market) Kingdom

Results

By performing a basic categorization and a basic statistical analysis. Figure 1.4 displays the funding source each fintech company have used. It is clear that most fintech companies choose venture capital as their fund sources. Many have partnered with TigerGlobal, Kleiner Perkins, Khosla

Ventures and Goldman Sachs to raise their funds. Out of the Forbes 50 companies; 3 companies used

Private Equity, 1 used Secondary Market, 1 used Equity Crowding funding and the rest 45 companies all used Venture Capital (VC). It is quite interesting to see that most of these fintech companies are favoring VC as their funding sources.

Conclusion

This research shows that Fintech companies does not purely depend on Crowdfunding and there is little correlation between the fund raised and the industrial sectors. It suggests that most of these Fintech companies It also implies that Fintech falls into standard start-up type in the eyes of investors. Results in this research give business students and faculties a better understanding on fintech companies’ business models and different funding sources. There is no doubt that technological advances are reshaping financial services. Block-chain, artificial intelligence and machine learning are making people’s lives more convenient.

Appendices

Figure 2.2: Business Model for Avant

Figure 2.3: Business Model for Affirm