Leaders from Flashpoint VC, Lytical Ventures, the Sony Innovation Fund, and Talis Capital assured audience members during an online discussion on Nov. 3 that investment in regulatory technology (RegTech) is not losing attractiveness to venture capital funds, despite crises around the world and worries of an economic downturn in the future. 

“It’s natural in a recession environment to reassess the risks companies take,” said Steve Berg, partner at Lytical Ventures. “We are experiencing a natural slowdown, but you can’t invest less in compliance. You don’t have a choice.”

"The RegTech space has witnessed a huge boost in new tech solutions since the previous crisis of 2008 and I believe that the current economic crisis will be no different. Compliance is eating the world and sooner every business will have to take care of it. This represents a tremendous opportunity for all the existing and new businesses operating in the space," - Donatella Callegaris, Managing Partner, Flashpoint Venture Debt, added.

As it stands now, the global regtech market is expected to reach $10.1 billion in size by the end of 2022, according to a recent Future Market Insights report, which is an increase compared to 2021. Compare that to the significant devaluation of some fintechs, especially neobanks and buy-now-pay-later firms. Klarna, for example, closed a recent funding haul at a $6.7 billion valuation, a share drop from the $46 billion it reached in June 2021.

Costantino Mariella, Senior Venture Capital investment manager at Sony Innovation Fund said, “B2B SaaS is currently suffering a drop in valuation. This is reflected in the target market as well. However, RegTech has been under the radar compared to the biggest sectors suffering less valuation increase. RegTech has suffered less hype and will suffer less drop in valuation accordingly."

“It’s been interesting to watch and speak to investors recently. We have never had so much demand in a round of investment than we have now. Because, in the macroeconomic slowdown, compliance is not optional,” said Evgeny Likhoded, CEO and founder of Clausematch.

Likhoded and the investors all agreed, after an unprecedented 10-year investment and capital-generating cycle, the push to consolidate some regtech companies is inevitable. Just this year, GRC software management solutions developer Ideagen agreed to a $1.3 billion offer from private equity firm Hg Pooled Management.

“On the one hand, there is this push to go for one company that can manage five products. There are so many solutions to make it easier, faster, and cheaper. So eventually there is undeniable consolidation coming,” said Vasile Foca, co-founder and managing partner at Talis Capital.

"And on the other hand, RegTech is not immune to the Amazon effect. For instance, onboarding Revolut takes three minutes. People are used to onboarding fast and are very well connected with smartphones. It means that compliance also needs to be fast to ensure this speed," he added.

The industry continues to see breakneck advances coming to the marketplace by a variety of companies, including Clausematch. Yan Shtefanets, VP of Product, remarked with thousands of complex regulations published every year, connecting data through AI has proved beneficial.

“AI could start helping us by transforming unstructured data into a more consumable format so we can easily identify relations and connections in compliance content,” said Shtefanets. “We can digitise compliance content and connect the dots with AI.”

Financial institutions in particular are adopting regtech, as they recognize regulations are not going to stop coming and their compliance departments can no longer sit in the back office.

“If you have a hope of surviving the avalanche, you have to do something. The regulators never sleep…the old ways of relying on the subject matter expertise of the few people who have worked for your organisation is not just going to cut it anymore. There is a real need to digitise that regulatory management role because it goes across many roles in your organisation,” said Melanie Wright, a North American compliance expert.

No matter what looms on the horizon, investment, development, and innovation in the regtech space continue, the panellists concluded.

“Regtech and compliance solutions are very, very sticky,” said Likhoded. “Our gross retention revenue is 99%. Net retention revenue is over 100%. Most of our contracts are three-year contracts. Yes, growth matters. Yes, revenue matters. The recurring revenue matters. But you can also show your contract value…your customers don’t leave the solution. So it’s a very resilient offer to the market. It’s a company that you are not going to see churn.”

A full recording of the conversation can be found here: https://youtu.be/q8ioXVCgTFU