Fintech is poised to drive out Tiger Global and SoftBank Mauling
The recent crackdown on fintech investment giants SoftBank and Tiger Global raises questions about the future funding of some of Europe’s most valuable fintechs.
SoftBank and Tiger Global, known for their open checkbook and gung-ho fintech funding approach, have both suffered bloody noses and lost billions of dollars as fintech and technology firms take a hammering.
Earlier this week, SoftBank’s mercurial founder Masayoshi’s son revealed that it vision fund, the world’s largest technology fund, had lost $21.74 billion in the quarter, as investments in unprofitable technology and fintech companies failed.
The Japanese conglomerate’s Vision Fund 2 is a prolific fintech investor and led multi-million dollar investments into Revolut, Klarna and eToro among others.
But it has been hurt amid a market rout that has hammered the valuations of public and private technology firms amid an adverse economic environment.
Major fintech investors
The rival fund Tiger Global, which has invested in Revolut, Checkout.com and TrueLayer, has also taken a hit and has lost around 17 billion dollars in the first five months of the year.
An indication of Tiger’s prominence as a fintech investor is that during Q4 2021 and Q1 2022, the US hedge fund was the most active fintech investor, backing 37 and 39 startups respectively.
The two fintech investors have both cut or dumped stakes with Softbank and said it will be “more selective” in its investments going forward, causing concern among the fintech community. Their bloody noses also raise questions about the valuation of their fintech investments, which are often tied to fintech’s latest round of funding.
Furthermore, experts question the impact their fail from grace will have on follow-up financing of fintechs and whether they can still count on support from Tiger and SoftBank.
Plenty of “dry powder” VC investments to go around
Ralph Rogge. co-founder and CEO of Crezco, the payments startup, says Tiger and SoftBank’s expected retreat from fintech investments could present opportunities for other, less prominent, VCs.
Rogge said: “There are many, many other VCs out there, who haven’t made headlines like SoftBank and Tiger, who have behaved quite differently, who have gone where those guys have bought.
“Maybe these other funds, the ones that maybe have been less aggressive in the last couple of years, the smarter ones, this is now their opportunity to deploy capital.”
Agree is Lucas Timberlake, the co-founder of the VC fund Fintech Ventures Fundwhich points to “plenty of venture capital dry powder to go around”.
However, he warns that, given the unfavorable market conditions, investors are currently not using capital as actively as before. But he expects an increase in investor activity later this year.
He adds: “We should remember that VCs still raised over $120 billion in the first half of 2022, which was an increase of over 60 percent compared to 2021 in the same period, as per PitchBook.
“I think things will start to pick up again this fall, but I don’t expect us to return to record 2021 levels anytime soon.”
Follow up on funding for fintech lovers?
Whether the likes of Klarna, Revolut and Checkout.com can still count on follow-on investments from Tiger and SoftBank will soon play out.
Richard Hoskinspartner on Kin Fund Services, which provides fund management services, said Tiger and SoftBank will “have to make some difficult decisions” about who to invest in going forward. Should they look to cut ties, it will be a test of these fintechs to bring in additional funding.
But these fintech darlings can point to an eye-popping list of alternative existing funding sources on their list, with Rogge pointing out that there are “many other VCs out there who would love to be part of the Revolut journey”.
Wrong strategy
Outside of the fintechs they have invested in, some fintech professionals believe the two investors’ open checkbook strategy was “misfired.”
Hadley Harris, co-founder of Eniac Venturesthe American investment fund in the initial phase, points in particular to their big efforts in 2021.
He said: “They invested as if multiples in 2021 were rational, which I don’t think is true. I think current multiples are way too compressed and will bounce back a bit over time, but nowhere near the level of 2021.
“We’re already seeing early signs that funding markets are returning, but I don’t see them returning to the open checkbook times we’ve seen in the last couple of years.”
But others believe there was value in their approach.
Timberlake said, “These firms tried to recreate an ‘index fund’ approach to private investing, which tends to correlate with the performance of the public market (eg Nasdaq). I still think there is value in this approach in periods of economic expansion.”
More downfalls to come
SoftBank and Tiger are not the only ones suffering in a challenging fintech investment market, which has been exacerbated by a slowdown in M&A activity and IPOs in the technology sector.
There is now the prospect that several fintechs, including those funded by SoftBank and Tiger, will suffer the ignominy of carrying out a Klarna-like down round.
Last month, Swedish giant BNPL raised an $800 million funding round at a post-money valuation of $6.7 billion, down significantly from $45.6 billion in 2021.
Hoskins points to industry figures showing around half of UK fintech unicorns were born last year, but says the status of “high burn rate” unicorns is “now in doubt”. Those who “adopted growth at any cost” will suffer the most, he says.
As an example, he points to the startup of AI insurtech Tractable, which was elevated to unicorn status last year after raising $60 million.
He said: “The bottom line is they have to go back to the market and raise more money and the likelihood is they have to do it at a lower value.”
Hoskins believes that down rounds can have a “doom loop” impact on startups, with lower valuations deterring employees.
The future
While SoftBank and Tiger have taken a crack at it, their withdrawal from fintech seems unlikely to have a long-term and profound impact on the fintech industry.
As Timberlake says: “Fintech companies with strong fundamentals will continue to be funded. While Harris points out an important consequence of the Tigers’ first place.
Harris says, “They were very upfront about the fact that they didn’t want to help founders. I think it exposed an uncomfortable truth for a lot of VCs, that some founders just want money and investors to stay away.”
