Fintech companies are facing a payoff when simple money dries up

As a wave of fintechs drove subsequent rounds of financing to ever higher valuations over the past five years, the Swedish acquisition now declared, later paying the company Klarna its ambition to become Ryanair, Tesla and Amazon in the sector.

But now that central banks are raising interest rates in the fight against rising inflation, Klarna is trying to raise new cash for less than half the highest valuation of $ 46 billion, and fintechs must reconcile with a world where expansion can no longer be driven by cheap money and business models must be demonstrated by profit.

A record amount of investment flowed into fintech companies in 2021, but many are now struggling to raise fresh funds and are discussing selling themselves or accepting lower valuations to stay afloat, according to investors, analysts and industry leaders.

On Thursday, payment service provider SumUp raised cash worth € 8bn – well below the € 20bn value proposed earlier this year.

And when the belts tighten, a fintech’s chances of survival can be measured by the amount of cash sitting on the balance sheet. “You are in a state of panic if your runway is less than a year old,” said Erik Podzuweit, founder and co-CEO of the German investment app Scalable Capital.

Venture capital firms more than doubled their investments in the sector last year to $ 134 billion, which helped fintech values ​​outperform any other technology sub-sector, according to Crunchbase data. Financing peaked in the second quarter of 2021 when investors such as Accel, Sequoia Capital, SoftBank and Berkshire Hathaway supported groups including Brazilian digital lender Nubank, German broker Trade Republic and Amsterdam-based payment company Mollie. Financial services companies accounted for about $ 1 out of every $ 5 in venture capital investments last year.

But now public fintech values ​​have collapsed even faster than they climbed as funding declined sharply in the first quarter. Fintech values ​​have declined more sharply than any other technology sector, according to a recent report by Andreessen Horowitz partners, which cited data from Capital IQ. The valuations fell from 25 times the forward income in October 2021 to four times in May.

Fintech fundraising in the last quarter fell 21 percent to $ 28.8 billion from the record high of $ 36.6 billion reached in the second quarter of last year, according to CB Insights.

“It was easy for funds that raised a lot of money to say ‘oh, we’ll just double the valuation.’ . . it does not necessarily follow the company’s performance, ”said Jonathan Keidan, CEO of Torch Capital, which has invested in fintechs such as Acorns and Compass. “The effects will be public by the fall.”

Many fintech companies raised capital at high values ​​based on ambitious growth targets, said Arjun Kapur, CEO of Forecast Labs. “With all the market changes, most of them will not reach the goals they have signed up for, which means the business is not worth what it has acquired.”

Although he expects the sector to return in the long run, “many companies will be pushed into the process”.

Investors have become particularly skeptical of consumer-facing digital challenger banks as high inflation reduces how much people can save and increases the likelihood of default. Financing for bankfintechs fell 48 percent to $ 4.4 billion in the first quarter compared to the same period last year, according to CB Insights.

Robert Le, fintech analyst at PitchBook, said a split in funding was likely, as fintech-oriented consumers are struggling while those who sell software to other businesses will prove more stable. Among these is the UK cloud banking fintech Thought Machine, which doubled its valuation to $ 2.7 billion in its last round of financing in May.

Meanwhile, executives such as Yorick Naeff, CEO of Dutch broker Bux, are considering postponing planned fundraising rounds. “These companies, including us, should focus more on the path to profitability,” he told the Financial Times. “If you are organized in a way that is only focused on growth… You are going to have problems.”

Many consumer fintech companies in the United States had begun to call back their marketing budgets in an effort to save money, said David Sosna, CEO of Personetics, which provides market insight for the banking industry. “We are definitely seeing some [clients] says, ‘OK, maybe we need to stop or slow down.’ ”

Bankers advise companies to save as much money as possible to run out what are likely to be two difficult years of collection.

“When you take the time it takes to raise a round, you probably need a 30 to 36 month run so you are not forced back into the market,” said a senior banker at a US commercial bank. Only extremely strong companies would be able to raise themselves to the same level as last year, the person added.

Freetrade, the British broker valued at £ 650mn in November, raised £ 30mn through a loan last month. CEO Adam Dodds said at the time that the move aimed to strengthen the company’s balance sheet without having to revalue it: “There are choppy markets. Resetting a valuation at this point may not be helpful. “

In addition to a lower valuation, which can be an embarrassing signal to markets and hurt morale internally, downsides may have stricter conditions such as strengthened liquidation protocols and anti-dilution protection, said S&P Global Market Intelligence analyst Tom Mason.

Selling out completely became an increasingly attractive alternative for many companies, said Keidan at Torch Capital. Apple’s privacy changes have significantly increased customer acquisition costs, making existing customer bases more valuable while reducing fintech values. Boards began exploring potential sales in the spring, he said.

Fintech acquisitions – which are already about to break the record in 2021 – are likely to accelerate throughout the rest of the year as traditional financial companies such as JPMorgan Chase and Mastercard benefit from relatively inexpensive software groups.

“I see it brewing very fast right now,” said Michael Abbott, global banker at Accenture, adding that ties between fintech challengers and established ones are on the rise.

Agreements so far this year include UBS’s acquisition of Wealthfront and Fiserv’s acquisition of Finxact.

“What consumers want is the best of what the neobanks have to offer in terms of experience and ability to get products quickly, but at the same time what they will need in an environment of rising interest rates, the balance of a bank. “, said Abbott.

An investor in a large private equity firm said they had received a steady drum beat from fintechs who wanted to sell themselves in recent weeks but had passed them all on.

“Who can say that this price is really the right price? What if, six months from now, that price is actually considered expensive? ”