“To call New York a growth story would be an understatement,” Dan Allred says. “It's on fire.”
There are obvious reasons for that. Wall Street is an easy one. “When you look at every sub-sector in fintech—insurance, property, crypto, wealth—for so many of them, New York is home,” Dan says. But the COVID crisis also sped along many of the financial modernizations that were bound to happen eventually. The end result is a frothy market full of both fast-maturing and brand-new companies with solutions that legacy players are only getting more excited to embrace.
Here’s what Dan has seen from his vantage point as a Senior Market Manager overseeing the National Fintech and Payments Strategy teams at Silicon Valley Bank.
Dan’s relationship with the innovation economy broadly and fintech sector specifically
In 2002, Dan Allred joined “a little California bank that had $4 billion in assets.” At the close of Q1 2021, Silicon Valley Bank held $142 billion. Over that time, Dan started the bank’s accelerator business, the group that sees startups through to becoming large businesses or seeing great exits, working closely with companies like Flywire, Veracode, and Carbon Black (acquired by VMware), and eventually taking over the Boston tech banking group overall.
Silicon Valley Bank is “very involved in the whole innovation ecosystem,” but the relationship is often closest with fintech companies, in part just because of the complexity of how the products entwine. Other tech clients come to SVB for bank accounts, operational payments, investment of excess cash, venture debt, working capital financing, and so on; fintechs can also leverage SVB for payments architecture, regulatory navigation, and warehouse lending.
A few months ago, Dan officially took over the national fintech practice, which has put his focus on New York and the Bay Area—“but spending more time in New York,” he says. “We are seeing that to be the fastest-growing part of our business. The growth we're seeing in New York, the quality of the companies, the caliber of the management teams, and the amount of investment that they're garnering is just off the charts.”
Breaking down trends in New York
From 2019 to 2020, the growth in overall venture spending in New York fintech was driven by more mature companies grabbing larger investments. “But looking at 2021,” Dan says, “What I think the run rate implies is that we’re got the same dynamic of lots of capital pouring into later-stage companies, but also more early stage companies. Which means you've got a whole ‘nother cycle of innovation coming.” The city’s on track to see $9.7 billion in capital invested across 245 deals this year; for comparison, investors put $3.1 billion into 175 deals in 2020.
“Not that all those companies are going to be successful,” Dan says, “but you've got that many more new companies that are pushing forward with new solutions and new approaches to the market.”
The other thing that you're seeing in New York is exit value. At 23 total, “the number of M&A events and liquidity events in five months of 2021 data is already greater than any of the prior years,” Dan says. “I think that’s really significant.”
“You see SPACs starting to be a way to go public, and more and more companies looking at it. I think you're going to continue to see that. The interesting thing is there's a lot of exit value that's being realized, but there's also plenty of capital available for these companies just to continue to grow privately as well. Valuations are frothy, but so is private investment. A lot of companies right now are just taking on as much capital as possible, just because the terms are so good.” Yet at the same time, burn rates aren’t quite ballooning. “It seems a little more disciplined right now than what we saw, say in 2014, at the advent of the unicorn boom. Back then you had to spend a lot of money to keep growing, but you had to keep growing to be able to continue to get the money that you were then spending. It was a nasty cycle”
Then there’s crypto. In New York, in crypto alone, there were as many deals through May as there were for all of last year. The amount of capital invested in that space through May of this year is over 2X the amount of capital invested there all of last year. “There's this tipping point in crypto, where there's institutional activity in crypto, which is just I think leading to that really taking off as a sector,” Dan says. “I actually do think that's one of the second-order effects of COVID, too: a little less reliance on anything traditional, which allows the payment rails and the asset value of crypto to start to shine through.”
Covid made the limitations of legacy systems clear
“Whenever I talk about COVID and the tech ecosystem in general, and fintech specifically, the way to think about it I think is: It didn't really change things as much as it accelerated where we knew we were going,” Dan says.
“We knew that we were headed toward this end-to-end seamless solution that was digitally enabled. Because of COVID, we got there a lot faster. The market necessitated that. You see that very clearly in payments. But you also see it in neobanks, the solutions presented themselves to customers in a way that appealed to specific verticals and niches like never before. COVID was a sort of a forcing function for that. A better way to do things. A new way to do things. And people were not only open to that, but needed it, really needed it.”
“But you also just saw just such a disruption in the way institutions worked. So PPP is a great example. PPP put so many alternative lenders or workflow lenders in the game or boosted their growth dramatically. Banks were unable to stand up a process to deploy that much capital that quickly. It exposed the need for the legacy financial system to have a new way of pushing a workflow to its clients. Letting the client apply for the loan versus the analog process of exchanging documents back and forth. PPP was a forcing function to push everything to the client and say, ‘You start the application. We'll communicate to the SBA and the funding will come through and you'll have your loan.’ Most banks just weren't able to do that. Whereas most fintech lenders were made for that. So that's a really good example of how COVID just accelerated everything. I think that would have happened anyway, but it needed to happen last April. Because of the pressure to deliver that seamless digital experience.”
New York is resilient. “We quickly got from the scary part to the frothy part,” Dan says. “By June of 2020, maybe slightly more than 90 days after the stock market started to crash, it was very clear that a lot of the companies that were enabling this kind of innovation were not so much in a hunker-down mode as they were in high-demand mode and off to the races.”
The party looks likely to continue
Though Dan’s first to say we can’t predict the future, “I don't see what's going to cause it to stop. Even with all the great growth that we've seen in the fintech sector in the last year, it's not like the work's done. It's not like we've completely reinvented how financial services are delivered.”
“Does the frothiness of the valuation stay where it is? Probably not. That's always going to go in cycles. And we're in an especially frothy time right now, but I do think this continues. I really do.
“We want to support the innovation economy, broadly speaking, at SVB,” Dan says. “And I think with respect to fintech we've got a team that understands not just fintech issues, we understand the sub-sector issues. We've got people that are expert in insurance, expert in crypto, expert in neobanks, payments, and so on. And we really do want to partner with these companies. We're super excited to look at this data and realize there are so many new early-stage and existing companies innovating in fintech.”