Burst Balloon as Startup Opportunity

Here’s a real-world example of how entrepreneurs turn disruption into opportunity. Back in Q3 2021, the fintech industry began a decline that bottomed out with a shocking 50% valuation collapse. Yet the fragments of that burst bubble fertilized the ground for new growth opportunities. The fintech industry’s rebirth offers a view into how entrepreneurs exploit and create change.

The Great Fintech Rout

It took fintech more than two years to recover its value from the burst 2021 bubble. What came back was very different than what left. Analysts believe some combination of the factors below tipped investors’ scales from greed to fear:

• Manic valuations (in some cases exceeding 20x revenue)
• Oversaturation (particularly among the darlings of the day — B2C companies)
• Recession threats
• Falling tech valuations overall
• Rising interest rates
• A slowing of the government’s massive pandemic handouts. That, in turn, cut consumer spending;
• Inflation (driven by those prior handouts and huge social engineering programs)

Could revisiting the fundamentals of business valuation have saved many fintech investors from the fallout of a classic burst bubble? (For those fundamentals, see How Investors Value Companies.

Meanwhile, Entrepreneurs Got Busy

As the market beat down overpriced B2C companies, early-stage B2B players began cautiously emerging from their burrows. These newcomers didn’t target consumers as their predecessor had, but rather served the needs of financial services companies, such as large commercial banks, saddled with legacy, stand-alone apps.

The nearby chart illustrates how smaller competitors increased their share of total fintech raises. In 2022, raises of less than $5 million accounted for 35% of all raises. By 2024, they reached about 45%.

Why Small Fintech Raises Increased:

• In risky times, investors can make many bets for the same cost as a few big ones.
• Many of the fintech companies seeking VC cash are early-stage, so their payoffs are typically years away. By then, their investors hope that exit valuations will have recovered.
• For strategics, small raises are a cheap way to stay at the table and watch emerging industry developments. They also allow investors to have more cash in reserve for the day when better, less uncertain times return.
• Many of these small, young fintechs addressed big commercial markets seeking better solutions, like:
  • The money-moving and storage business is now dominated by huge legacy banking, insurance, money management, and money transfer institutions that handle trillions of dollars each year.
  • Mobile applications that enjoy a long-tail growth curve, especially in developing nations that may never have the terrestrial facilities to support competitive alternatives. (Africa combines both these growth opportunities — competing against aging earth-bound players and growing wireless access.)
• The government stopped distributing pandemic checks and raised interest rates to quell the resulting inflation. That reduced B2C spending and demand for the buy now/pay later and neobank models.

Lessons?

• In your rearview mirror, the opportunities to exploit weaknesses in the fintech industry are obvious for the many reasons outlined above. But were they then? Only for those with the courage to act on them.
• Underneath these developments specific to the fintech industry lie patterns that will repeat and be exploited by future startup entrepreneurs.

Want to trade thoughts about the future of fintech? Email us.
Revised 2/3/26. © 2026 Kuhn Capital, Inc. All Rights Reserved