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November 7, 2022

RegTech tends to show an opposite trend in the economic recession compared to other SaaS sectors

Anna Antimiichuk
Global Head of Communications, Clausematch

US and Europe’s leading tech VC’s – Sony Innovation Fund, LyticalVentures, Talis Capital and Flashpoint discuss investment and RegTech at theSaaS lounge co-hosted by Flashpoint VC and Clausematch 


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


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


"Compliance is eating the world, and it's no longer optional tomake the area responsible for the client secure," Donatella Callegaris,Managing Partner, Flashpoint Venture Debt, added. 


As it stands now, the global regtech market is expected to reach $10.1billion in size by the end of 2022, according to a recent Future MarketInsights report, which is anincrease compared to 2021. Compare that to the significant devaluation of somefintechs, 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 $46billion it reached in June 2021. 


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


“It’s been interesting to watch and speak to investors recently. We havenever had so much demand in a round of investment than we have now. Because, inthe macroeconomic slowdown, compliance is not optional,” said Evgeny Likhoded,CEO and founder of Clausematch. 


Likhoded and the investors all agreed, after an unprecedented 10-yearinvestment and capital-generating cycle, the push to consolidate some regtechcompanies is inevitable. Just this year, GRC software management solutionsdeveloper Ideagen agreed to a $1.3 billionoffer from private equity firm Hg Pooled Management. 


“On the one hand, there is this push to go for one company that canmanage five products. There are so many solutions to make it easier, faster,and cheaper. So eventually there is undeniable consolidation coming,” saidVasile 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 toonboarding fast and are very well connected with smartphones. It means thatcompliance also needs to be fast to ensure this speed," he added.


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


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


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


“If you have a hope of surviving the avalanche, you have to dosomething. The regulators never sleep…the old ways of relying on the subjectmatter expertise of the few people who have worked for your organisation is notjust going to cut it anymore. There is a real need to digitise that regulatorymanagement role because it goes across many roles in your organisation,” saidMelanie Wright, a North American compliance expert.


No matter what looms on the horizon, investment, development, andinnovation in the regtech space continues, the panelists concluded. 


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


A full recording of the conversation can be found here: