Venture capital firms continued to actively back RegTech companies in 2020 as financial institutions left the space.
Total investment in the RegTech sector rocketed from 2017 to 2019 growing at a compound annual growth rate (CAGR) of 119.1%, as investors increasingly backed companies looking to solve and bring efficiency to outdated compliance processes. Accelerators, leading venture capital firms and financial institutions all backed companies in the sector lured by the potential size of the market for regulatory technology. Indeed, the top three investors during the period were Accel, Y Combinator and Goldman Sachs with 25, 18 and 17 transaction completed, respectively.
However, this year has seen accelerators and financial institutions retract from the space given the uncertainty brought about by the global pandemic. All but one of the most active investors in the first three quarters this year are VC firms. The only exception is Y Combinator, a global startup accelerator, which participated in six deals. The largest transaction the company backed was the $42m Series B round raised by Proxy, a smartphone-enabled digital identity software provider.
M12, Microsoft’s Venture Fund, and Accel have been the most active investors in the industry in the first nine months of 2020, participating in seven funding rounds each. Microsoft has been in talks with regulators to demonstrate how AI could improve bank compliance and its investments are aligned with the goal of becoming a bridge between banks and start-ups innovating in the area.
Duncan Taylor, director of financial services at Microsoft, said its artificial intelligence technology could allow banks to identify transactions or advice in breach of ever more complex and onerous laws and regulation. The firm most recently participated in the $30m Series C round raised by SpyCloud, a company developing account takeover prevention and fraud investigation tools.
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