Fintech’s 2022 valuation collapse grinds on. We thought it would. But new fintech growth opportunities are emerging and we tell you where.
The 2022 Crash Continued
The asteroid that took out the dinos spared the small, fast-evolving creatures living in their shadows. Similarly, fintech’s 2022 crash hit the industry’s biggest players hardest — public companies, unicorns and later-stage growth stories. Fundings and valuations collapsed 50% and more.
In sum, by Q2 2023:
- The value of a public fintech breadbasket (a fintech ETF) had fallen about 60% from its November, 2021 high;
- The volume of fintech funding had collapsed spectacularly, 80% lower than its Q4 2021 high, though deal count dropped “only” 45% from its Q1 2022 high. Unfortunately, July, 2023 brought no relief — dollars declined another 3% versus June while deal count dropped 14%. Last month the average fintech raise fetched $14 million compared to $53 million in October, 2021.
© CB Insights 2023. See this CB Insights video for more detail.
- And M&A transaction value had dropped by about half from its high in August, 2021 while deal count fell 35%. Last month the average M&A fintech transaction was $14 million. In August, 2021 it was $32 million.
© FT Partners 2023. FT Partners is the most comprehensive source of data on the fintech market.
The fact that funding deals counts dropped substantially less than dollar values means the average deal size fell. That’s a clue as to where life still stirs in the post-asteroid world that is fintech.
What Happened?
Observers (see Carta and SP Global among others) claim some combination of the factors below tipped investors’ scales from greed to fear:
- Manic valuations (up to 20x revenue)
- Oversaturation (particularly among the former segment darling — B2C);
- Recession threats;
- Falling tech valuations overall;
- Rising interest rates;
- Fewer government pandemic handouts so less consumer spending;
- Inflation.
What didn’t get dinged were, in general, start-ups and mobile apps that challenge creaky 3rd world banks and insurance companies. We think a key reason they were spared is precisely because they’re small. Why is that? See our WHO’S GETTING FINTECH FUNDING IN 2023?
It Ain’t Over Till…
So while 2023 through July continued fintech’s 2022’s slide, at least it was at a slower rate.That said, the only fintech sector that actually showed a Q2 funding increase ($3 billion) was B2B financial management solutions. All other sectors – banking, crypto, wealth management, payments, healthcare fintech and Insurtech continued their so-far persistent decline. See FT Partner’s charts for sector detail.
While even more value destruction is of course possible, we think we’re now hovering over a sort of fragile floor that we speculate will last about a year.
Quo Vadis?
As the months pass, the path to fintech growth opportunities becomes clearer.
Promise and Scale
Fintech followers say that the industry’s promise is too big to fail. So is the global scale of the huge financial services industry overall. We agree with both assertions. And fintech’s slice of the action is still in the low digits or even less. QED, fintech followers exhort investors and entrepreneurs to keep their hands steady on the wheel.
Out with the Old
More specifically, a chorus of analysts note that the new B2C is B2B. That is, in 2021 and 2022 those waves of government pandemic checks drove at-home consumer spending, buoying demand for B2C payments companies.
Old School FintechLow interest rates also boosted the buy now/pay later and neobank B2C models. And in those days (just months ago after all), the huge legacy players hadn’t come up with their own fintech solutions like Zelle.
In with the New
Those days are done. Now the flavor of the day is the B2B fintech that provides tools to –
- Ease the tasks of SMB CFOs and CEOs;
- Help make legacy financial services players more efficient (as opposed to competing directly against them);
- Enable something called B2B2X. Meaning they sell to businesses that bundle their app together with the other services they offer their end-users. It’s aggregation without acquisition.
What’s a Fintech Entrepreneur to Do? Know That…
- Small is beautiful;
- B2B is back;
- Funding is harder – it takes more time and costs more — but it’s still happening;
- Small mammals beat giant dinos.
