Spend a minute reading startup funding headlines and it’s tempting to think that nearly every new venture is a financial service of some flavor or another.

Okay, maybe not every new venture, but it certainly feels like financial services—an expansive sector encompassing banking, investing, payments, lending, insurance, and more—is generating a lot more interest from both investors and founders these days. Indeed, it is quite literally where the money’s at.

Financial services is where you’ll find some of the world’s most valuable private, tech-enabled companies. Stripe, recently valued at USD 95 billion, built a civilization of sorts by starting with a payments API and branching into other areas like identity verification and carbon offsetting. Klarna, the Stockholm-based ecommerce payments giant which processed USD 53 billion in gross merchandise volume in 2020, is valued at USD 46 billion, becoming Europe’s most valuable tech startup in the process. Revolut, valued at USD 33 billion, is a “financial super app” serving over 15 million users responsible for generating GBP 261 million (USD 361 million) for the company last year, up 57% from 2019. The list goes on.

In the club of companies valued at USD 1 billion or more, financial services are well represented. But what about earlier in the startup fundraising lifecycle? Do financial services startups raise more money in their first few rounds than the market as a whole? Is the growth in VC round size a global phenomenon, or one mostly isolated to the United States? Using data from more than 10,000 seed, Series A, and Series B rounds raised by financial services startups between 2016 and August 2021, we aim to answer these questions and more. 

Before diving into financial services, let’s take a step back and take a holistic look at global venture capital funding data. By analyzing in excess of 42,500 seed rounds, over 19,700 Series A rounds, and more than 9,400 Series B rounds announced worldwide between January 2016 and July 2021, it’s abundantly clear that the size of seed and early-stage venture capital rounds is on the rise.

Seed and early-stage venture capital rounds look like they got a lot bigger in 2021. While it’s certainly true that companies are raising more money today as compared to even a couple of years ago, it’s important to note that the very dramatic jump between 2020 and 2021 may be slightly exaggerated due to known delays in venture capital data. Large rounds backed by prominent investors are more likely to be covered by the press and added to databases like Crunchbase rather quickly, whereas smaller rounds (or rounds raised by companies keeping a low profile) may take several quarters to appear.

Even with those caveats, the run up is real. In a zero interest rate policy environment, investors seek yield in ever riskier corners of the market, and equity in small companies with big ideas is about as risky as it gets. With such an abundance of capital in the market, founders have more leverage to negotiate their terms, which often results in more money at higher valuations above historical precedents.

This is especially true in the world of financial services-focused venture dealmaking.

It’s tempting to think that companies in the financial services sector would raise more money in their venture rounds than companies in other industries, but that’s not really the case here.

Since most new startups in the financial services industry are software businesses, they have similar upstart and scaling costs as other software companies. And since software companies make up the majority of venture capital-backed businesses, it starts to make sense why fundraising numbers for financial services companies are in line with those of the market as a whole.

However, as we’ll show, the more interesting finding is how the balance of power (at least on the fundraising side) shifts between geographies and stages of growth.

Set aside the increasingly nebulous definition of what qualifies as a seed round,  it’s at this stage where financial services companies consistently raise more than the full-market average.

There’s likely a variety of reasons why this seed round premium exists. One likely cause is that many of these companies are offering more than just software, it’s software that does stuff with money, and, unsurprisingly, that takes money to do. Lenders need capital reserves, exchanges need a liquidity pool, instant payments processors need cash to make merchants whole while waiting for the transaction to clear the banking or credit system. In other words, capital requirements of one form or another are a startup cost, one that upstarts in other sectors don’t need to bear.

Looking at geography, it’s immediately striking that such a large percentage of Seed dollars are going to financial services startups outside the United States. 

2021 has, so far, seen a fairly rapid shift into international markets. With 63% of Seed deal volume and 67% of the Seed dollar volume reported year to date, it’s clear that the market for financial services startups is growing faster outside the U.S.

If Seed money is raised to get a company’s product off the ground and achieve enough traction to indicate the likelihood of future success, Series A funding is there to build a sustainable and repeatable business model around that product.

In general, companies in the financial services space don’t really raise much more or less than the market average as you can see in the chart below.

In financial services, there are many different revenue models ranging from subscription and transaction processing fees to referrals and data reselling and everything in between. Regardless of the business model, companies invest their Series A money into recruiting key talent, establishing a set of processes for discovering and serving new customers, and expanding or refining the scope of their product offerings to appeal to the largest market possible.

Speaking of serving large markets, here too we see an upswing in the share of Series A funding raised by non-US startups.

Although the rest of the world netted approximately 53% of the Series A deal volume so far this year—the lowest proportional share in years—67% of reported Series A dollar volume went to financial service startups based outside the US.

At Series B and all the rounds further down the alphabet, growth is the name of the game. Once a company has a repeatable business model and a solid product roadmap, it’s easier to project just how much value a certain amount of investment will create. At this point it’s just a matter of raising enough money to achieve those targets, but not so much that a company loses its operational discipline. As HP co-founder Bill Hewlett said, “More companies die of indigestion than starvation.”

Most financial service businesses have minimal marginal costs, so scaling up from a few thousand customers to a few million customers is not really the hard part, from a technical perspective. The hard part is gaining public awareness and scaling the sales and customer support side of the business. But, again, the operations of a software-enabled financial services company are similar to any other type of software company, so their funding patterns echo the market as a whole.

By these metrics, 2016 was an outlier year, and it’s important to understand why. One major disadvantage to using averages is that major outliers within the data can skew results significantly. And there is no outlier more major than the USD 4.5 billion Series B deal that China-based Ant Group (called Ant Financial at the time) announced in April 2016 (as an aside: Ant Group’s Series B was the largest-ever VC round at the time it was announced. It would be eclipsed by Ant Group’s preposterously large USD 14 billion Series C round, which the Alibaba spinoff announced in June 2018).

Excluding that round and a USD 1.2 billion Series B raised by the China-based investing platform company Lu.com, we see that the 2016 average Series B for financial services companies came in closer to USD 22.7 million, much more in line with the worldwide average. 

Looking at the five years that followed Ant’s unprecedented funding rounds, we see that more non-US companies are securing funding and American startups are gaining ground at Series B and beyond. American financial services startups raised 48% of Series B funding into the sector in 2020, and have raised 46% of the Series B dollar volume so far in 2021.

Startups raise capital to get off the ground, and when you’re in the business of making money move or helping it grow, investors are ready to back those ventures. This is a global trend.

Europe’s established financial technology industry continues to expand, and developing economies in Africa, South America, and certain parts of Asia are bypassing the establishment of a “traditional” banking sector and are going straight to tech-enabled solutions.

Some of the most valuable companies to come out of the first internet boom in the 1990s were financial services providers. It’s a trend that continued in each subsequent generation of startups, and as we’ve seen here, it looks like financial services continues to be a destination for more investor cash.