The History (and Future?) of Fintech Funding
According to CBInsights, in 2022 fintech funding across the globe fell by 50% to reach $33 billion. In fact, according to Crunchbase, fintech’s 50% decline was more severe than that seen by the average of all industry sectors — 35%. Here in the US, (home to a third of worldwide fintech spend), fintech funding also fell by about 50% and continued falling through 2022’s Q4. Another ardent follower of the fintech industry, FTPartners, generally agrees with these morose numbers. Simply extending 2022’s downward trend into 2023 would seem to predict even lower levels ahead even without considering the widespread reduction in start-up debt financing due to the collapse of SVB and other such lenders. To add to the dispiriting news, the availability of exits for US fintech investors also took a hit:
- M&A dropped 30%.
- And SPACs fell off the map from 17 to 3. (RIP another SPAC bubble, this time embedded in what now looks like a fintech bubble).
Yet bright spots do exist for fintechs seeking funding. They have to do with a combination of the company’s stage stage, the potential of the market it addresses and how much money it seeks. To understand why that is, let’s first explore the reasons behind fintech’s anemic 2022 funding volume.
Why Did Fintech Funding Drop So Precipitously?
FTPartners blames the fintech slide on “high inflation, rising interest rates, and fears of a recession.” Indeed, rising interest rates dampen investor leverage and therefore make deal financing more costly. And recessions of course ding sales. But wouldn’t these drivers apply across all companies seeking funding? And wouldn’t fintech’s ability to reduce costs and speed transactions prove more attractive than most in such inflationary times? Instead, we think that more subjective, non-quantitative factors like social turmoil, widespread politicization, and general public company stock volatility are mostly responsible for dampening private investors’ animal spirits across the board. And since fintech in 2021 flew higher than most other segments, it got burned worse and fell farther than most in 2022. Think Icarus.
What Fintechs Are Attracting Money Now?
As it happens, there are two types of fintech players that continue to raise money successfully.
Fintechs that address “blue ocean” markets
A few examples: Fintechs still have a long way to go before fully penetrating — and effectively competing against players in — the money moving and storage business. These are the huge legacy bank, insurance, money management, and money transfer institutions that pass around trillions of dollars each year. And fintech mobile solutions similarly enjoy a long-tailed growth curve especially in developing nations, which still don’t (and may never) have the ground infrastructure to support reliable, low-cost, widespread use. Check out McKinsey’s analysis of fintech’s explosive growth in Africa to learn more. In fact, Africa combines both types of growth opportunity — competition against inefficient legacy players and wireless solutions. Then there’s the second type of fintech luring today’s investors…
Smaller, earlier-stage fintechs looking for less cash
“Small is beautiful” is back.
- The number of 2022 early-stage fintech funding deals remained stable versus 2021 (and in 2022 early-stage deals accounted for nearly two-thirds of all US fintech deals). At the same time, in 2022 the number of mid- and late-stage fintech deals declined..
- Also, the median size of seed financings actually increased in 2022 from $3 million to $4 million while Series A funding grew from $12 million to $13 million.
- Last, the median seed valuation popped from $10 million to $14 million in 2022 while median Series A valuations leaped from $51 million to $60 million.
Why this interest in these smaller, less developed companies?
- We believe a key reason is that they need less cash. Less cash means less at risk in uncertain times. You can spread the same amount of dry powder around to more bets on the craps table. Let a thousand flowers bloom.
- Second, because they’re early-stage, their pay-off is up to five years away, presumably when exit valuations and liquidity will have recovered.
- Third, they’re an economical way for investors (including “strategic” investors) to stay at the table to watch industry developments.
- And fourth, they permit investors to keep more cash in reserve for when better, less uncertain times return.
So Is Your Fintech in the Funding Sweet Spot?
If you’re running a venture-stage fintech and are looking for $10 million or more, we’d be happy to chat about whether the water is fine in your particular case, and whether there are certain steps you might take to enhance your company’s value before diving in. We look forward to your contact.