Why investors are still pouring their money into fintech firms
It’s no secret that the pandemic and now the global toll of the cost of living crisis have posed big, successive challenges for fintech startups’ business models. Eye-watering valuations have fallen sharply as a result of a series of ‘down-rounds’. Reports of a ‘downturn’ have taken hold, with some firms pulling out of global expansion and making staff cuts.
There is, however, still huge fintech investment potential and VCs aren’t shying away from that. We mustn’t forget, many analysts have put recent dips in tech stocks down to a much-needed market correction. And if you look beyond some of the biggest names dominating recent headlines, you’ll see innovation is still happening and new use cases are being created all the time.
The VC mentality has shifted, there’s no question about that. Investors are moving away from ‘growth at any cost’, and towards less of a reliance on relentless capital injections. They’re doubling down on businesses which are cash generating versus aggressively high growth, particularly against the backdrop of a rising interest rate environment. If fintech firms can find a way to fight through, then there is money to be spent.
In the UK, there was a 24 per cent increase in fintech capital investment in the first half of 2022 compared to the same period last year. This meant a collective $7.3bn investment spread across 375 deals jumped to a $9.1bnn investment spread across 294 deals. Note here: more fintech investment, but less deals. VCs are backing less fintech firms now than they were a year ago, but the ones they are backing are getting bigger, or more consistent, investments.
Across wider Europe, fintech deal figures have fallen so far this year to their lowest six-month total since 2020. But looking at the last complete year, 2021, investors pumped almost three times as much money into fintech firms based in Germany, France and the UK as they did in 2020, a sign that confidence had returned following the pandemic. Record levels of fintech investment were also seen in the Nordic region ($18.5bn), Ireland ($1.6bn), Africa ($1.8bn), and Israel ($900mn) last year.
This year, some of the biggest fintech names – Klarna, Trade Republic and Starling Bank – have managed to tap their existing investors for hundreds of millions to firm up their balance sheets. Meanwhile, Revolut has said it has enough funding to last the next two years with no need for further funding rounds.
But while tried and tested fintech firms are getting repeat investments this year, we’re also seeing a change in VC appetite. Most notably, a steer away from typical challenger bank models to fintech propositions in other parts of the tech space. By sub-sector, payments led the way in the first six months of 2022, with $3.8bn raised across Europe buoyed by Checkout’s £1bn raise in January and SumUp’s €590mn capital injection in June. Wealth management also jumped up into second place from fifth this year, suggesting a new area of focus for investors.
So, what are fintech investors saying right now?
In the past few months, every investor seems to have been saying the same thing. Just two words. Organic growth. But what does that actually look like? Let’s see.
Khalil Hefaf, investment manager at Target Global, told Sifted in July: “It seems like in 2021 there was a lot of willingness from investors to underwrite deals where the problem being addressed wasn’t an artificial one and the market was huge, but maybe the current iteration of the business model needed work…Higher interest rates will fundamentally lower the future value of the cash flows of the high-growth companies being sought after.”
In other words, the fintech firms which VCs want to invest in are:
- addressing a tangible problem;
- with a large underserved market;
- have a model with room for development;
- are cash generating first, high-growth second;
- and can weather a downward spiralling valuation climate.
For smaller fintech firms, this means planning for long-term growth and thinking about when investment might be needed. As EY laid out in its ‘Fintech Journey’ series: “For a startup to evolve into a scale-up, it is…important for the company to develop a long-term financing strategy that is aligned to its growth path.”
Series A rounds are proving resilient, despite investors noting a slowdown hitting early stages. Eight of them told Sifted in June that high-performance firms can still raise competitive rounds, with several mentions of business-to-business models as an area where they see opportunity.
To those startups feeling the pressure of all the funding rounds for fintech firms so early on in their development, Luc Gueriane, chief commercial officer at our partner Moorwand, told FinTech Futures readers last year: “Sharing the news that a business has received funding is always going to sound impressive to potential customers and the wider market but don’t read too much into it as a rival early stage company.”
Gueriane’s thinking was that firms with a proven concept are more likely to attract investor attention than those raising for the PR value alone. He concluded: “If you’re seducing investors based on their agenda rather than your own, then you may experience a clash of expectations later down the line.”
What will we see in the future?
Despite the dips this industry has experienced over the past two years, fintech is unquestionably a growing market. UBS said last year it expects global fintech revenues to grow from $225bn in 2020 to $750bn in 2030, implying an average annual growth rate about three times faster than the broader financial sector’s. Where there’s huge projected growth, we know there’s almost always investors.
“As a payment processor, we’re not seeing anything slowing down in the long-run,” our chief product officer at Carta Worldwide, Dante Siracusa, explained. “More fintech-like products are also being requested as add-ons to non-financial products as the buzz of embedded finance becomes a reality.”
Siracusa has also commented that he is seeing a lot of time being invested in business-to-business products at the moment. Investors are, for example, betting on business-focused, buy now, pay later startups as stretched cash flows become more common against the backdrop of rising costs from energy bills and inflation. Business-to-business groups have been dubbed “all the rage” by fintech advisories. Meanwhile, the consumer sector struggles on. Ultimately, Siracusa expects to see funding become more considered, but remain very much available to new and existing businesses in the market.
The London Stock Exchange is currently backing a new review into the rise and fall in fintech funding and valuations, launched in July by Fintech Week London. At the launch, key industry bodies said they were keen to move away from “hyper-valuations and unsustainable business models”, taking the opportunity to refocus on financial products and services which improve the world in real-time. PHA Group account director Rhys Merrett said for fintech to remain a core industry in economies like the UK, it needs to transition from growth to consolidation.
“A reduction in valuations and fintech investment is not necessarily a negative trend,” said Merrett. “If anything, it ensures the sector can collectively take a step back and properly evaluate its long-term direction. After all, with Web3 technologies like blockchain on the horizon, we are very much likely to see a new wave of fintech innovation in the coming years.”
straight to your inbox
Sign up to the Carta Worldwide newsletter
to get the latest insights and news