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July 20, 2022

Fintechs seemingly buck the VC downturn

Investors are still betting on fintech firms, but there are still clouds on the horizon

By Eric Johansson

Investors seemingly throw money at fintech companies, despite market uncertainties forcing startups to sack thousands of employees, slash their valuations and even go out of business.

The tech industry has had an abysmal start to 2022. After enjoying soaring stock prices, massive exits and huge investment rounds during the course of the pandemic, tech companies have seen their outlook go from bad to worse over the first six months of the year. Tech stocks – such as Alphabet and Apple – have tanked since January. In the same time, the cryptocurrency market has crashed and investment advisors have warned that investing in tech stocks is like playing with fire.

There’s no shortages of factors contributing to the market slump. Russia’s invasion of Ukraine, the hangover from the pandemic and surging interest rates, have all been identified as potential culprits behind the rotten state of tech affairs.

The fintech industry has not been immune to the downturn. Buy-now-pay-later (BNPL) company Klarna provides the clearest example of this. The Swedish fintech held the title of being Europe’s most valuable privately owned tech venture for a year after scoring a $45.6bn valuation on the back of a $639m funding round in June 2021. However, it suffered a bruising $800m down round at a $6.7bn valuation in July. Klarna also announced in May that it would fire 10% of its staff, citing worsening market conditions as a factor.

The BNPL firm is not alone in having announced redundancies. Other fintech companies – such as payment processing startup Bolt and tax credit venture MainStreet – have also announced significant redundancies in their workforce.

That being said, fintech firms like Revolut and Wise are still actively recruiting new staff.

Several fintechs have already collapsed this year. The hyped-up one-click checkout startup Fast, imploded in a spectacular fashion in April after attempting to drum up support for its services with Nascar sponsorships. Crypto lender Celsius provides another example. The firm filed for bankruptcy after its assets shrunk from $25bn to $167m due to the crypto crash.

Moreover, publicly-traded fintechs like PayPal, Coinbase and Block have struggled on the stock market. Their market caps plunged by billions of dollars in the last few months. Things are, in short, looking rather grim.

However, new data from three different sources suggests that investors are still eagerly betting on fintech businesses. While investment in other industries have slowed down, innovators in the financial services space have so far enjoyed funding on par with the levels seen in the record year of 2021. But fintech companies still have reason to be worried.

Investors still back fintech ventures

As of July 19, investors had injected $30.1bn into fintech companies across 983 deals in 2022, according to data from research firm GlobalData. This is less than half or the $84.5bn invested into the sector across 2,358 deals in 2021. It is also just shy of the $30.6bn that investors splurged on fintech ventures in 2020 in total.

It would be easy to worry about the fintech industry with this constant 'sewage flow' of bad news. However, research from fintech industry body Innovate Finance suggests that things aren't as bad as they seem.

The industry mouthpiece suggests that investors have injected cash into the fintech industry to the tune of $59bn, which would make the year-on-year investment levels flat compared to those seen in 2021. Innovate Finance analysed 3,046 deals. Innovate Finance estimates that fintech startups enjoyed $131bn in total across the globe in 2021.

"One thing is clear [amongst all investors]: there is plenty of dry powder to invest," Kevin Chong, co-head of Outward VC, said in canned remarks. "Though this recovery will be slow. Inflation takes time to fix [so we can expect] it to take a good two years for things to go back to ‘normal’… VCs are being more choosy and more concentrated. There is [simply] less appetite for growth at all costs as in the past few years.”

That being said, the researchers noted some troubling signs in the second quarter. Innovate Finance believes investors topped up fintech companies' coffers to the grand total sum of $32.8bn across 1,754 deals in the first quarter of 2022. That represents a 21% growth from Q1 of 2021 when $27.1bn was injected into the sector across 1,795 deals.

However, in the second quarter of 2022 those figures dropped to $26.3bn being across 1,291 deals. That's also a drop compared to the $32.5bn invested across 1,606 deals in Q2 2021, a 19% drop in capital invested.

Fintech rules supreme in Europe

Fintech companies in the US led the funding league, having raised $25.1bn in the first six months of 2022, according to Innovate Finance. This was followed by the UK ecosystem that raised $9.1bn in total. India's fintech community raised $3.9bn between January and June.

These figures are echoed in a new report from KPMG. The consultancy's new Venture Pulse report noted that the US is still leading the pack when it comes to VC investment in general. VC-backed companies, and not just fintechs, raised $120.2bn in the second quarter across 8,420 deals in the US. In Europe, that figure was $27.3bn across 2,220 deals.

These funding rounds resulted in 97 new unicorns around the world, with fintechs making up about a third of that figure. However, KPMG warned that $1bn companies could suffer down rounds that could slash their valuations.

"Unicorns valued at exactly $1bn could consider giving significant concessions to investors in order to retain their unicorn status," the researchers wrote.

Still, looking specifically at fintech, KPMG said that the industry is still looking strong and that investors are still betting on players in the field.

"Fintech will likely remain a strong area of investment in many jurisdictions around the world, in addition to supply chain and logistics, cybersecurity, and alternative energy," their researchers wrote.

GlobalData is the parent company of Verdict and its sister publications.

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