Fintech venture capital

Abstract

Manuscript Type Empirical Research Question/Issue Where are fintech venture capital investments taking place around the world? What is the role of institutional factors on the international allocation of fintech venture capital? Research Findings/Insights We document a notable change in the pattern of fintech venture capital (VC) investments around the world relative to other types of investments after the global financial crisis. We show that fintech venture capital investments are relatively more common in countries with weaker regulatory enforcement and without a major financial center after the financial crisis. Also, we show the fintech boom is more pronounced for smaller private limited partnership venture capitalists that likely have less experience with prior venture capital booms and busts. These fintech VC deals are substantially more likely to be liquidated, especially when located in countries without a major financial center. Theoretical/Academic Implications We build on the institutions and corporate governance literatures by showing the importance of enforcement in driving relative differences in investment patterns and investor participation. For entrepreneurial startups, regulatory arbitrage drives investment into countries with a dearth of enforcement and regulatory costs. We argue that the spike in fintech venture capital in certain countries is attributable to differential enforcement of financial institution rules amongst startups versus large established financial institutions after the financial crisis. Practitioner/Policy Implications Regulatory arbitrage in the context of fintech venture capital can spur booms and busts. Less experienced venture capitalists seem more prone to undertake investments that exacerbate boom and bust cycles. National governance is strengthened by the enforcement of regulatory standards, and corporate governance through investor experience and oversight can mitigate these swings, and facilitate better investment outcomes.

New methods of entrepreneurial firm financing: Fintech, crowdfunding and corporate governance implications

“…Finally, Cumming and Schwienbacher () represent one of the first papers on fintech venture capital. They build on the institutions and corporate governance literatures by showing the importance of enforcement in driving relative differences in investment patterns and investor participation.…”

“…Or will these differences persist or even be amplified by local financing and traditional institutional controls (Globerman et al, )? How can we differentiate the role of more formal, legal institutions from less formal ones embodied in culture and social capital (Cumming & Schwienbacher, ; Scott, ) in addressing and explaining such differences?…”

Where Did FinTechs Come From, and Where Do They Go? The Transformation of the Financial Industry in Germany After Digitalization

“…Despite the rapidly changing environment in the financial industry, almost no studies have investigated the FinTech-bank relationship and how the emergence of FinTechs affects the traditional banking sector. A notable exception is the study of Cumming and Schwienbacher (2018), who investigate the pattern of venture capital investments in FinTechs around the world. They find that venture capital investments in FinTechs can be attributed to differences in the enforcement of financial regulation among start-ups and banks after the financial crisis.…”

The Impact of the Regulatory Sandbox on the Fintech Industry, with a Discussion on the Relation between Regulatory Sandboxes and Open Innovation

“…The FCA seeks to provide these firms with five advantages: the ability to test products and services in a controlled environment, reduced time-to-market at a potentially lower cost, support in identifying appropriate consumer protection, safeguards to build into new products and services, and better access to finance [1]. This regulatory sandbox and other actively supportive policies are regarded as critical drivers of the fintech industry's growth by experts [9]. Hong Kong introduced the regulatory sandbox to its financial sector in June 2016.…”

“…In addition, one of the primary goals of regulatory sandboxes is to attract the attention of investment sources such as banks, private equity, and venture capital funds [8]. In reality, the United Kingdom, which was the first country to introduce the regulatory sandbox, has many competitive fintech technologies and companies and is also considered to be one of the most active fintech markets at present [9,10]. Moreover, most leading countries in fintech have also introduced regulatory sandboxes and consequently, have seen a marked increase in expectations for the effectiveness of regulatory sandboxes.…”