Dusseldorf, Frankfurt Max Linden is 20 years old, has just dropped out of his economics degree after four semesters and is now receiving 15 million euros. Investors from venture capitalists Lakestar, Lightspeed and Creandum trust him to create a new financial technology (fintech) company of enormous size. “We want to build an integral part of the capital markets infrastructure for Europe,” says Linden about his start-up Lemon Markets.
Specifically, Lemon Markets wants to enable other companies to offer securities trading and carry it out independently. The Berlin company could therefore provide the digital infrastructure for other financial service providers, but also for large companies in other sectors that want to invest their cash reserves intelligently. Dax companies, for example, could then also manage their money themselves.
15 million euros is a lot for a company in its early stages. But business models like that of Lemon Markets are exactly what venture capital investors are currently looking for: Fintechs have been the absolute boom market since 2021 at the latest. According to Comdirect and Barkow Consulting, 4.6 billion euros were invested in German financial technology companies in Germany alone.
There is much to suggest that investments are now being concentrated even more strongly on B2B providers in the segment – i.e. companies with a focus on business customers (business-to-business).
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The trend has been talked about for years. But then the hype about trading platforms for end customers during the pandemic overshadowed everything. But now the market could actually turn.
Well-known investors rely on companies that operate in the background
Even before Lemon Markets’ financing round, well-known investors had recently invested money in young B2B fintechs from German-speaking countries: For example, the well-known US investor Andreessen Horowitz invested in Payrails, an operating system for international payment transactions at e-commerce providers. There was almost six million euros for this.
Index Ventures, based in San Francisco and London, has invested four million euros in seed capital in Topi. The founders Estelle Merle and Charlotte Pallua want to simplify payment transactions between companies. And top investor Sequoia relies on Yokoy: The three-year-old Swiss platform for expense and expense management recently received 72.5 million euros.
>> Also read: Payrails: Why the famous investor Andreessen Horowitz is hot for this fintech
In contrast, financing rounds in consumer-oriented fintechs (B2C) have become rarer. This applies to both young and mature companies. The valuations for the smartphone bank N26 (nine billion dollars) or the neobroker Trade Republic (five billion dollars) from last summer are even questionable due to the current market development.
2022 started with different signs: At the beginning of the year, growth-oriented technology stocks plunged worldwide: The prospect of higher interest rates in the USA caused investors to reallocate money to other undervalued segments. Then came the Russian attack on Ukraine, the sanctions and with them many imponderables.
New start-ups have better prospects
“The Ukraine war is creating uncertainty among investors,” says Lars Hornuf, Professor of Financial Services at the University of Bremen. Investors are currently much more selective.
However, this is unlikely to affect the new B2B fintechs. On the contrary: Firstly, start-ups with completely new business models benefit compared to the more mature and already highly valued ones. The closer a company is to a possible IPO, the faster the development will hit the public capital markets.
Experts expect a boost in the B2B area. It is now a matter of “tackling more systemic problems and supporting existing companies in improving their financial processes and value for customers,” predicted KPMG partner Bernd Oppold at the beginning of the year.
Second, this B2B fintech wave is benefiting from the strong development of its B2C predecessors – and from the pressure they are putting on established financial institutions. The existing banking landscape is in a state of upheaval, says finance professor Hornuf: “That’s also where the greatest volume of possible income is found.”
Thirdly, B2B companies are usually much cheaper for venture capitalists to set up than B2C companies: “End customer providers such as neobanks live on volume and branding, which is expensive,” says fintech investor Christian Nagel from the venture capital firm Earlybird. “This makes it increasingly difficult for new providers to enter the market.”
Venture capitalists often make more profit with B2B companies
The reason is the high marketing costs. Companies like N26 have to spend a large part of their capital on advertising, especially on the big Internet platforms. “Companies like Lemon Markets don’t have to pass money on to Google and Facebook,” says Creandum partner Simon Schmincke, one of the first investors in the Berlin B2B fintech. “The initial effort is greater, the business partners have to be convinced and integrated – but once it works, growth is much cheaper.”
In fact, an analysis by Handelsblatt and Earlybird last year showed an enormous range in investor returns. In the best case, the money had multiplied fiftyfold when it was valued at billions, in the worst case it had only doubled. An important factor here: the advertising effort.
>> Also read: Will the fintech bubble burst? The war in the Ukraine and shaky stock markets are affecting the valuations of financial start-ups
Max Linden carefully analyzed the success strategies and mistakes of his predecessors. After the launch in the second quarter, developers should be able to easily log in and experiment with the new Lemon Markets interface. The 17-employee company is counting on the developer community eventually attracting corporate customers on its own.
Even before the official start, Lemon Markets claims to have traded “several million volumes” via the platform with its partners Baader Bank and DonauCapital. “The worst thing would be if we couldn’t be reached for an hour,” says the CEO. Reliability is particularly important for a fintech brand. With other fintechs, one could see how quickly the trust built up can be lost.
Meanwhile, he is not worried about competition, although one of Germany’s largest fintechs wants to offer a very similar service. Solarisbank is already enabling corporate customers to offer loans and installment payments, and securities transactions should also be possible in the future.
Linden sees the focus on securities trading as an opportunity to “do something really, really well” and thus convince. But he also doesn’t shy away from competing with Solarisbank in other areas at some point: “Customers want a partner who offers them everything,” he says.
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