How can investors choose the best RegTech startups to back?

With more and more RegTech startups appearing on the horizon, it is getting harder for investors to differentiate the good from the not so good according to Velocicor CEO and RegTech Canada co-founder Matt Elton.

As the industry is growing in size and in maturity, the landscape from what to invest in is changing. It is increasingly more difficult for investors, who are not themselves subject matter experts, to know what it is a good investment. “Just because it is shiny, high tech,  and is labelled ‘AI or Blockchain’ it doesn’t necessarily mean it’s a good investment”, according to Elton.

As the regulatory landscape continues to evolve daily, industries are turning to innovate in technology in order to be compliant and save costs. This has resulted in a rush for RegTech investment, peaking in 2016. Last year, the global RegTech industry received more than $889m in investment according to data by FinTech Global. This represented an increase on the $742.7m invested in 2015.

Over the past few years the RegTech offering has been slowing growing out of the burgeoning FinTech space, and with the investment continuing to rise, many industry experts believe the ‘sub-sector’ has the characteristics of surpassing its “bigger brother” in the near future.

One of the reasons behind the increase in investment is because the sector differs from the ‘FinTech proposition’, according to Elton. RegTech is not coming along to ‘disrupt an established industry’ like FinTech, instead its providing solutions that will help an established industry do what it does but in a more efficient way.

“RegTech can deal with increasing and more challenging regulatory requirements, which you can’t solve. By bringing a solution the traditional industry can benefit and the economy as a whole benefits as there is a better regulated and supervised industry, which ultimately protects the consumer better”, according to Elton.

Another compelling reason for investing is because financial services isn’t the only industry it can provide benefits for as the same underlining technology can be used to solve similar challenges in other industries.

“It is starting to be used in the energy industry, oil and gas, pharmaceutical, healthcare, these are all highly regulated”, Elton added. “If you compare the regulation and the compliance obligations in the pharmaceuticals industry with the financial services, they are far stricter. There is a massive market for regulated industries which can benefit from RegTech, it not just financial services.”

How to spot the good from the not so good?

The key to finding the right investment opportunity in the space comes down to discovering ‘someone doing something different’ and ‘someone who is solving real problems’.

With ‘people picking up the low hanging fruit’ and the wave of startups tackling KYC/AML and onboarding, it is currently a struggle to find something ‘unique’ according to Elton.

“If you are starting with automated onboarding, when everyone has already done automated onboarding, you have to be very special to make it worth doing”, he added. “You have to understand what the real challenges are and what is keeping the compliance officer up at night.

“It is also very important to have a holistic view of the value chain, so you have to be able see where your solutions sit in the whatever industry is in. Are you willing to invest in a certain part of the value chain if elsewhere in the value chain there are bigger problems or challenges?”

With the industry currently awash with a lot of small players, Elton believes there inevitably needs to be some of consolidation going forward.

“One of two things will happen: niche providers will either come together as a group and provide a suite of services, or the bigger firms, like Accenture, IBM, Deloitte, will start to suck up the smaller providers to create a holistic tool or their own. So, if you are looking to invest, I would start looking at the more holistic solutions.

The investor also needs to examine the calibre of the solutions in the market. If startups want to sell into that industry they need products and services that are cable of meeting the industry expectations in terms of security and reliability etc according to Elton.

“There are things that the industry sees as ‘must-haves’, but in the start-up world are seen as unnecessary. These startups might have the solutions but they are not enterprise ready and not industry grade. There is no way that a risk officer could possibly recommend buying these products”, he added.

As the MiFID II deadline approaches, startups providing a solution for the regulation have been in-high demand. However, Elton is wary of backing companies which are addressing solutions for one particular regulation, instead he suggests at looking at what provides a real long-term value to the market.

“If a holistic platform comes along which does regulatory reporting across multiple jurisdictions and maximising your reporting position than that is far more interesting to investors.”

 

Matt Elton

Matt has more than 20 years international experience in the interaction of finance and technology. Having worked in a variety of environments, he has worked with some of the largest companies in Europe and Canada, as well as assisting smaller companies to grow and achieve their ambitious growth aspirations. Today, he runs a group of companies in Belgium, Luxembourg and Canada focused on monetising digital opportunities. Recognised as experts in existing and emerging technologies and their impact on business strategies, our focus is RegTech, WealthTech, Banking, Payments, Regulation, Compliance and Supervision.

 

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