This article was originally published in FIN, the best newsletter on fintech. Subscribe here.
It’s not exactly a secret that fintech companies have had a hell of a start in 2022. As with the dot-com meltdown that began in early 2000, pressure from public markets has revealed weaknesses in the once dizzying sector, and it has again affected both private valuations and new investments. Just as unicorn values and conspicuous IPOs defined the first half of 2021, layoffs and bailouts define 2022.
Pitchbook recently published a comprehensive guide to the red ink, and it is sober to read.
As FIN noted last month, the insurance sector has been particularly hard hit. Pitchbook points out that insurtech shares have fallen by around 80% in the last year, compared to the S&P 500’s decline of 23% and the NASDAQ’s decline of 32%. Undoubtedly the worst performer in this gloomy group is Hippo, who presents himself as focusing on “proactive home protection”. The company was listed on the stock exchange last year through a merger with a special acquisition company (SPAC) supported by heavyweights such as Reid Hoffman. The Hippo share is currently trading at less than $ 1 per share, and last month the board removed co-founder Assaf Wand from the CEO.
Still, at least Hippo trims its losses. Doma, a company that uses machine intelligence to streamline the real estate closure process, seems to be heading backwards, despite all its technological prowess. In the first quarter of 2022, Doma wrote fewer premiums than it did in the first quarter of 2021, and saw operating losses increase by more than 600% in that period. According to estimates accumulated by Pitchbook, the company is not expected to have higher revenues in 2024 than this year. Doma was also listed on the stock exchange via a SPAC, and has seen the share fall by around 90%.
Brokers who depend on cryptocurrency trading are just as gloomy. Coinbase shares are down 80% over the past year, and Pitchbook estimates that the company’s revenues in 2022, 2023 and 2024 will all be lower than in 2021.
In short, this is not a temporary setback that will be reversed by a quick fix in either technology or investor enthusiasm. This is a secular shift that will lead to sector consolidation and changes in investment behavior. Why is this really happening? The timing, as with so many recent economic changes, is related to the rise in interest rates, designed to combat inflation which in itself was a result of the demand for lockdown. But more specifically for fintech: In the very first part of FIN in October 2020, we talked about the «COVID accelerator». The necessity of remote life made things like contactless payments and roboadvisors far more attractive and urgent than they had been in 2019 and before. The government’s stimulus payments were also a factor, which temporarily drove up the volume of day trading as well as other forms of expenditure. Of course, fintech is here to stay, but most companies will now have to focus on profitability as opposed to groundbreaking growth.
