Investors are starting to worry about ‘froth’ in one of the hottest tech markets around

Oscar Williams-Grut/Business InsiderFinovate Europe 2016.

The picture you’re seeing shows 1,500 people packed into London’s Old Billingsgate, all there to talk about one thing — fintech, or financial technology.

It’s the Finovate Europe conference this week, the debutante ball for innovative financial technology startups doing everything from online investment to backend optimisation for banks.

Across the two days, over 60 startups will each get 7 minutes to pitch their ideas to banks, investors, and potential customers — it’s fintech’s X Factor.

Financial technology, known by the buzzword fintech, is one of the hottest areas for investment at the moment, with billions flowing into the sector around the world.

As a result, it seems like everyone who’s anyone wants to be seen at Finovate. Pretty much every imaginable bank is here to scope out the competition and keep their finger on the pulse — Dutch bank ABN Amro alone has sent 11 people — and I’ve spotted attendees as esoteric as representatives from both the Government of Ontario and Kenya.

The conference has been running around the world since 2007 and this week’s event in London is the second biggest, just pipped by last September’s conference in New York. Everyone I’ve spoken to is surprised at just how busy it is.

Clearly, fintech is not just hot — it’s steaming. But is the market overheating?

A venture capitalist bumped into shortly after arriving mentioned without prompting that they were keen to see how “frothy” the market is right now. Less than half an hour later I overheard an employee of a European banking software company saying: “Anyone with a bright idea is starting a company and it’s just exploding.”

It seems like there’s a creeping feeling that every man and his dog is piling into the fintech market right now, chasing the bountiful cash flooding into the sector. But just how viable or sustainable many of the businesses popping up remains to be seen.

Georg Ludviksson, CEO of Iceland’s Meniga, which makes personal finance apps, told me: “Wherever there’s a lot of VC investment there’ll be froth.”

Meniga was founded back in 2008 and so has seen the hype around fintech build. Ludviksson is bullish on fintech, believing there are plenty of startups out there that will change the market. But even he admits: “There’s a lot of investment but I don’t know how much of it will come to something.”

A senior banker at a US investment bank who has worked on several private fintech investment deals over the last year told me at the conference that there’s a growing skepticism among investors.

He’s seeing increasing value adjustment in the market as investors do stricter due diligence and reassess how much fintech companies are really worth. Revenues and market share are becoming a lot more important than just smart ideas and potential.

But Alex McCracken, managing director of venture services at Silicon Valley Bank, says that there’s actually less froth in fintech that there have been in many other tech markets in the past, such as e-commerce for example.

“The hurdles of getting into growth stage in fintech are higher because there are regulatory and compliance hurdles,” says McCracken. “It’s pretty obvious to spot the people who do know them, from those that don’t. It is easier to screen a team compared to any other digital area.”

Still, the funding tap that many aspiring fintech entrepreneurs are looking to drink from could be about to dry up.

McCracken says 2016 is a year of “sorting the wheat from the chaff” for tech investors, saying: “We just drew up some thoughts about what 2016 looks like for the tech market. There’s been a lot of early stage investing. But what saw in Q4 in California was seed and early stage investing halved in number compared to 12 months previous. But the dollar amount invested increased. What that means is earlier stage VCs are doing relatively fewer deals but supporting the ones they want to do quite well.

“This is doubly so in fintech because, although there was a lot of froth in terms of funding in lots of particular subsets, what’s become clear now is who are the one or two leaders in a particular subsector. It’s easy for the VCs to keep supporting those companies rather than finding ‘new new’.”

That means we’re likely to see a lot more follow-on rounds for more established companies such as TransferWise, Funding Circle, and Crowdcube.