Fintech agreements have officially retreated to levels before 2021

The latest figures for European fintech show that investment is declining from the 2021 highs, more evidence that the sector feels frozen in the midst of the fall in technology stocks and concerns about an economic downturn.

So far this year, Dealroom figures show that European fintechs have increased $ 13.2 billion – still a solid total, but the lowest six-month sum since 2020. The picture is even darker just looking at the second quarter, when the companies collected 5.5 billion dollars, weakest quarter since the beginning of 2021.

“It seems that in 2021 there was a great willingness from investors to sign agreements where the problem that was solved was not an artificial one and the market was huge, but perhaps the current repetition of the business model needed work,” says Khalil Hefaf, Investment Manager at Target Global.

“Now there is much more focus on margins and a concrete path to profitability, given the funding squeeze.”

Just like the first quarter, the second quarter’s total was boosted by mega-rounds in later stages such as Bloom’s huge £ 300m Series A, Paddles’ $ 200m Series D and Taxfix’s $ 220m Series D – when all three joined the fintech unicorn club. A number of major fintechs also conducted follow-up rounds to maximize the runway in the midst of financial uncertainty.

The sector completed 289 rounds in the second quarter from data obtained on Monday, down from 307 in the first quarter and the subsequent 300+ quarterly sums it has been withdrawn since Q4 2015.

Entrepreneurs who completed rounds in the second quarter describe consistent investor interest, but increased focus on the path to profitability when pitching. Meanwhile, investors say that although some of the foam may have come from the market, there is still considerable competition for agreements with companies with the strongest business models.

“Essentially, this period will sift between what is nice to have and what you must have,” Hefaf adds.

The rounds begin

As the region’s most valuable startup, Klarna is a fairly good measure of what is happening in the broader sector. When it temporarily laid off 10% of the global workforce at the end of May, a number of other fintechs began to follow – including Nuri, Uncapped, Curve and Bitpanda.

And now $ 800 million has been raised in a round of funding that has reduced its value by more than 85% to $ 6.7 billion – down from $ 45.6 billion this time last year. It has beaten it far from the top position as Europe’s most valuable fintech. But VCs tell Sifted that it is only a matter of time before this trend filters through the sector.

“We would not be surprised to see corrections take place across the board, and Klarna warns of this,” says Hefaf.

“In the absence of significant improvement in KPIs, it will be very difficult to justify value appreciation. Higher interest rates will fundamentally lower the future value of the cash flows of the high – growth companies that are sought after.”

Last month, the British payment start-up company SumUp became the first fintech in Europe to have its value cut when it collected 590 million euros to a business value of € 8 billion – less than half the figure it was previously linked to.

And so do the follow-up rounds…

Fintechs at a later stage also used the second quarter as an opportunity to increase cash to cope with the financial uncertainty by contacting existing investors in some significant follow-up rounds.

Two of the biggest rounds in the second quarter were expansions: The Berlin-based trading app Trade Republic received an expansion of 250 million euros to its 750 million dollars Sequoia-led Series Cand the United Kingdom’s Starling Bank made use of existing investors for 130.5 million pounds to “build its war chest for acquisition” after its £ 322 million series D round last year.

And while the biggest BNPL giant, Klarna, struggled to maintain its valuation, two smaller rivals – Scalapay and Zilch – managed to convince investors that they were worth supporting with a little more money.

In May, Scalapay raised one extension of $ 27 million to $ 497 million Tencent-led Series B in February, and in June Zilch secured another $ 50 millionand takes the total amount raised in Series C to $ 160 million.

European fintechs 10 biggest rounds

Checkout.com’s huge $ 1 billion Series D series in January displaces all other rounds of funding in the first half of the year, followed by SumUp’s round of € 590 million in June, and GoCardless’s entry into the Unicorn Club with its $ 312m Series G in February.

Seemingly out of nowhere, London-based revenue-based startup Bloom burst onto the venture-backed stage in May with a massive $ 377m Series A led by Credo Capital and Fortress Investment Group LLC. This makes it one of the most well-capitalized fintechs in the area, and is a vote of confidence in the lending model from investors despite fears of rising interest rates.

Following SumUp and Trade Republic’s hefty rounds, the Berlin-based tax filing app Taxfix scored one of the period’s biggest rounds of a $ 220 million Series D led by Teachers’ Venture Growth – and became one of Q2’s two new additions to the fintech unicorn club.

The other new unicorn was the London-based SaaS startup Paddle, which was valued at $ 1.4 billion in a $ 200 million Series D in May.

Sweden’s niche neobank June entered the top 10 with its $ 100 million in Series B in June, so did the British fintech SaaS company Codat, which raised $ 100 million in a Series C led by JP Morgan’s venture arm.

Payment controls the cane

When it comes to fintech sub-sectors, it can come as no surprise that payments continued on their winning streak and dominated funding in H1 2022, receiving $ 3.8 billion – up from $ 2.1 billion in the last quarter.

Interestingly, given the rising interest rates and inflation during the period, asset management rose from the fifth most popular sub-sector in Q1 2022 to the second most popular sub-sector among investors in H1, raising $ 3.4 billion in investment.

Crypto has had some difficult months, when the market lost over 1 tonne in value and several cryptocurrencies collapsed. But the sector still managed to appear among the top 10 fintech sub-sectors in the first half of the year, attracting $ 1.3 billion – about half of the total $ 2.7 billion in funding it received in 2021. This may be due to some deals being ended before the crypto winter began – All eyes will be on whether VCs remain so eager in the second half.

And we could not help but notice the number of fintech API software seed rounds completed during the period, as investors are investing in B2B fintechs that can help other companies streamline operations in the current economic climate. In just one week in June, Sifted spoke with startup Pile about “crypto as a service”. sin pre-seedinvestment API provider Upvest about without series B and payment flow API Formance about its $ 3.1 million pre-seed.

“Fintech can be quite resilient as a sector, and some sectors as better tools for CFOs to track spending, cash flow forecasts or scenario planning are needed more than ever in these turbulent times,” Lucile Cornet, partner at Eight Roads, told Sifted.

“We also continue to track some secular trends in fintech – such as A2A [account to account] payments, institutionalization of crypto or open insurance – which are multi-year efforts for us VC investors. ”

Largest locations for fintech investments

In line with the trend of recent years, the UK has continued to dominate European fintech financing, reaching a peak with a total of $ 7.2 billion invested so far this year.

France has had a particularly strong first half, after overtaking Germany (which occupied second place for 2021) in the first quarter. It maintained second place for the entire first half of the year, attracting $ 2.2 billion in investment in fintechs – already approaching the $ 2.5 billion it attracted throughout 2021.

What’s coming?

Despite some valuations and a slight decline in overall funding, investors and entrepreneurs at Sifted say they are still fairly confident of European fintech’s ability to attract investment – albeit at a slower pace than in 2021.

When it comes to competition for agreements, investors point out how many crossover funds and family offices that operated VC in 2021 are taking a step back – but that among VCs, a renewed focus on business models of the best quality means that more investors are chasing the same appointments.

“Fewer companies meet the criteria, so you tend to have more investors watching at the same time,” says Hefaf.

As fintech is so closely linked to the financial markets, investors expect that some sub-sectors that are less exposed to macroeconomic headwinds will be more popular than those in the crossfire.

Those who depend on debt facilities, as BNPL and income-based financingis among the most exposed to rising interest rates.

Meanwhile, the founders describe a more challenging fundraising environment at medium to late stages than previous stages have emerged so far.

“I heard from many founding friends that it has been more difficult to raise Series A and B, so many have gone for extensions instead,” said Jessica Holzbach, founder and CEO of crypto-API provider Pile, which raised € 2.8. millions pre-sown last month, Sifted says.

One sector that has attracted a lot of attention from investors in the current climate is B2B BNPL – a fast-growing club of fintechs that provide loans to businesses instead of consumers to help them manage their cash flow.

One such fintech is Hokodo, who raised one $ 40 million in Series B in a round led by Notion Capital last month. Co-founder and co-CEO Louis Carbonnier tells Sifted that while the company’s pitch deck remained unchanged, investor control definitely increased as the fundraising process continued.

“As it was a Series B, there was no expectation that we would be profitable at the time of collection, but in 2022 there was a clearer focus on our unit economy, our guarantee performance and the overall path to profitability for the business,” he says.

“What developed was the follow-up questions asked by investors – we could feel an increased focus on profitability and subscription discipline.”

Meanwhile, if private fintech startups have enough runway to hold tight, they may be more shielded from the macroeconomic environment than their public peers.

“So far, the numbers show some decline, but still relatively high activity levels – VC rounds and valuations remain high compared to the correction seen in public markets,” says Cornet.

“I think there is still an appetite among VCs for top assets with strong teams and strategic positioning, and although I expect H2 VC distribution to be much lower than the 2021 levels, it may not be as bad as everyone looks. to believe. ”

Amy O’Brien is Sifted’s fintech reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter – You can register here.