‘There’s less noise’: How investors are dealing with the fintech slowdown
Dec. 23, 2022 Updated Fri., Dec. 23, 2022 at 8 p.m.
After a grueling year for London’s fintech scene, the Holly Jolly Tech Party earlier this month suggested there were still reasons to celebrate.
Over cocktails and breaded shrimps, investors and entrepreneurs who made it through the valuation slumps, job cuts and fundraising headaches admired the city skyline from a rooftop bar above Leicester Square.
The event, and others like it, reflect a continued appetite to hobnob, shake hands and sniff out investments – at the right price.
“We just came out of COVID and people want to meet again in person,” Stephanie Choo, partner at Toronto-based investment firm Portage Ventures, said over a video call. “Also, investors typically want to do deals.”
A quiet summer gave way to boardroom conversations on budgeting ahead of the new year, “trying to figure out the right balance between obviously still needing to grow, but needing to be prudent,” Choo said.
Investors like Choo don’t want to miss out on the “generational opportunity” presented by the current batch of start-ups, even though deals are taking longer than they might have a year ago, when fintech was among the hottest sectors for venture capitalists.
Funding globally for financial technology firms – often shortened to fintech – smashed several records last year, with fintech start-ups capturing $1 in every $5 from venture capital firms, according to CB Insights.
This year, however, there were signs of cooling and consolidation that took investments back to 2018/2019 levels, according to European investor Finch Capital.
The number of fintech start-ups created in the region dropped 80% on the prior year, falling further from the peak set in 2018.
Initial public offerings fell 70%, Finch said, partly reflecting a marketwide drought in stock market debuts.
Venture capital behemoths such as SoftBank and Tiger Global Management have felt the sting of slumping valuations, as their portfolio companies attempt to pivot from breakneck growth to profitability.
Still, there’s appetite for deals after the “impressive growth, perhaps overheated” of 2021, according to Finch.
Investors in fintech have a record $28 billion in undeployed capital.
“The shift has been in the noise level,” said Michael Treskow, partner at Eight Roads Ventures. “Last year, investing was like being at a festival. This year, you’re in a smaller venue, where there’s less noise.”
The past year seems to mark the end of the fast-growth era for fintech, which was juiced up by low interest rates that made funding cheap and a pandemic that shifted consumer behavior.
For start-ups raising cash, there was essentially a Christmas sale.
If they managed their money well, they’d cope. But if they viewed it as the new normal, they were in for a rude awakening.
“Our view was always that 2021 wasn’t sustainable,” Blossom Capital’s Ophelia Brown said. Harry Briggs of technology-focused investor Omers Ventures said this year marked a “return to sanity” and could result in a healthier funding environment for start-ups with more realistic expectations.
“A lot of money was being wasted on bloated teams, expensive offices and things that don’t really matter that can often largely slow people down. And I think start-ups thrive in scarcity,” Briggs said.
He thinks fintech valuations probably have further to fall.
There was a shift in tone this year from even the biggest and most bullish fintech entrepreneurs.
They were no longer talking about going public, while some were forced to slash their spending.
Klarna, the buy now, pay later platform, announced in May it was laying off 10% off its staff, and in July it raised a fresh $800 million – resulting in a valuation of just $6.7 billion, down from $45.6 billion a year ago.
Payments company Checkout.com recently cut its internal tax valuation to $11 billion.
Smaller start-ups might not be as affected by multibillion-dollar down rounds, but the dramatic moves at the top of the market have reinforced a sense of caution about growth plans.
“For founders and leadership teams, cash and the path toward profitability will continue to be king, especially at growth stages,” said Jeppe Zink, partner at venture capital firm Northzone, which invested in Klarna.
Because of this shift, the work on making each sale profitable is now “baked in at seed,” according to Remus Brett of venture capital firm LocalGlobe.
Brett also said he was encouraging founders to build a plan that’s based on three years of runway instead of two years before raising again, given the economic uncertainties.
It’s not all gloom and austerity, though.
Michael Sidgmore, partner at San-Francisco based Broadhaven Capital Ventures, has just finished a three-week trip in Europe to weigh up deals.
He rounded off the visit with a trip to a tinseled pub in London’s West End, to watch the World Cup match between Morocco and Spain, and to discuss the diverging fortunes of start-ups and more established firms this year.
While late stage funding has taken a tumble and unicorns have dropped to their lowest level since 2020, early stage investment is on the ascent, says Sidgmore.
He’s still excited about the European fintech ecosystem and there are still “plenty of high-quality companies solving big problems out there.”
Some firms have been keen to point out other silver linings.
At Accel’s fintech summit in December, partner Luca Boccio made the case that although fintech has been hit hard, the sector is increasingly a dominant part of the technology ecosystem.
His firm found that over the last decade, more than $200 billion has flowed into fintech across North America, Europe and Israel, with plenty more to come.
The past year could be a pivotal moment for the sector as it matures, some investors believe.
More dollars are going into niche spaces such as the infrastructure layers of fintech, which has certainly been creating work for Julia Andre, partner at Index Ventures.
It’s now a buyer’s market, said Andre, who has recently been spending time with founders in Estonia. Her philosophy is that challenging times mean companies have to focus on what’s important.
“Historically, we’ve seen great companies being built in these times,” she said.
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