Fintech funding trends indicate that this year will underperform in 2021

Of Monica Johnsoninternational banker

2021 was a fantastic year for the fintech (financial technology) industry. According to CB Insights, global fintech funding rose to a record $131.5 billion across 4,969 deals. This was 21 percent of all venture capital (VC) funding during the year and significantly more than the $49 billion recorded in 2020 across 3,491 deals. Business intelligence firm Crunchbase also noted that VC firms more than doubled their investments in the sector over the year to help fintech valuations outpace any other tech subsector.

Has 2022 been able to keep up with this pace? Not quite, given the challenging global economic conditions that have emerged this year, which continue to cloud the outlook for VC firms and other investors. CB Insights’ data showed that global fintech funding in the first quarter fell 18 percent to $28.8 billion from the previous quarter, the largest percentage drop in quarterly funding since 2018. And perhaps most notably, banking fintechs experienced a 48 percent drop in funding to $4.4 billion in the first quarter compared to a year ago.

In fact, funding for US-based fintechs has fallen moderately in 2022 so far. “Against a bullish and bearish stock market environment, venture dollars to US fintech companies held up surprisingly well in the first quarter (Q1) of 2022 with $9.30 billion raised across 244 deals,” reported Celeste Goh of S&P Global Market Intelligence 1 .June “While the numbers reflect a 21 percent and 16 percent decline in transaction value and volume, respectively, quarter-on-quarter, it’s worth noting that 2021 was an exceptionally strong funding year for fintech companies, and fundraising levels in the fourth quarter. has generally been higher than other quarters in the last two years.”

Separately, S&P reported that funding for Asia-Pacific (APAC) fintechs has performed quite well this year, with fintech funding in the first quarter hitting a year-over-year record high. Fintech companies based in the region raised $3.33 billion across 186 deals during the three-month period, eclipsing previous deal values ​​and volumes recorded for the first quarters of the past three years. S&P also noted a strong recovery for digital lenders, the fintech segment hardest hit by the pandemic, as it came out on top of all fintech categories, with $1.28 billion raised across 52 deals.

But the report sounded a note of caution for APAC, observing that while record year-on-year funding levels in the first quarter may have appeared positive for the region, a quarter-on-quarter analysis revealed that funding levels in the first quarter represented a 26 percent decline in the dollar amount being raised and a drop of 9.7 per cent in the number of agreements. “Fintech fundraising activity may see a further decline in subsequent periods in [the] in the wake of an underwhelming public stock market and further rate hikes, the S&P report said, adding that more mature fintechs would be able to show more resilience in the face of changing investor sentiment. “More established FinTechs continue to see new funding from new investors, and their propensity for inorganic growth in this uncertain climate seems to indicate confidence in their ability to raise more capital.”

The African fintech space also appears to be following a similar pattern to APAC. According to research firm FinTech Global, more than $2 billion was raised across 287 deals last year for fintech companies based in Africa, which was a huge jump from the mere $0.5 billion investors gave fintech companies in 2020 across of 243 agreements. But while African fintechs completed 83 deals in Q1 2022, raising a total of $465 million, FinTech Global acknowledged that if the next three quarters follow this funding rate, total 2022 investment by fintechs in Africa will be 7.9 percent lower than last year.

As for Latin America, in 2021 $15.7 billion was invested in the region’s startups across all sectors. And VC investment hit its fourth-largest record in Q1 2022, according to the Association for Private Capital Investment in Latin America (LAVCA), which found startups in the region raised $2.8 billion across 190 deals during the period. This was 67 percent higher than a year earlier and more than four times the amount for the 1st quarter of 2020.

In addition, when it comes to Latin America’s (Latam’s) fintech sector, start-ups were easily the main recipients of VC funding during the first quarter, accounting for 43 percent of investment, equivalent to $1.2 billion, and 16 percent more than the previous year . . “We have continued to see cross-pollination of business models within the sector: Payment platforms increasingly include BNPL [buy now, pay later] alternatives, lending platforms have become full-service digital banks, challenger banks have expanded their product suite to include embedded credit products and working capital facilities, Carlos Ramos de la Vega, director of venture capital at LAVCA, told TechCrunch in June.

But while Q1 reports certainly describe a solid first quarter for fintech funding across most parts of the world, recent data suggests that businesses will face more challenging headwinds for the rest of the year. Indeed, more hawkish monetary policies being implemented across much of the world mean that start-ups can no longer be financed by funds obtained at rock-bottom interest rates. On the contrary, borrowing becomes markedly more expensive as the central banks continue their work to reduce rising inflation through higher interest rates.

Most indicators therefore suggest that 2022 will fall well short of 2021’s bumper year for financing across most sectors, fintech included. According to Crunchbase data, global VC funding in May fell below $40 billion for the first time in more than a year, reaching $39 billion. It also fell 14 percent from April’s $45 billion and was a sharp 20 percent year-over-year decline, where May 2021 had recorded $49 billion in funding. Crunchbase further noted that much of the decline can be attributed to late-stage investments and technology growth, while seed funding has held up quite well. In fact, late-stage VC funding in May fell from 2021’s average monthly funding by nearly 40 percent. In contrast, early-stage funding was down 22 percent from 2021’s average monthly funding level — $13.7 billion versus $17.6 billion.

Similar funding trends are observed on a sectoral basis within the fintech area. For example, cryptocurrency startups were the most invested fintech sector in Q1, according to an analysis by startup intelligence firm Dealroom. Crypto firms raised $7.0 billion in the January-March period, more than any other fintech segment, while the crypto and decentralized finance (DeFi) sector was recorded as the fastest growing segment, increasing by more than double the financing sum in the 1st quarter of 2021.

However, given the pronounced sell-off across the cryptocurrency space, which has seen the price of bitcoin fall to less than $20,000, there is already considerable evidence to show that the appetite for funding crypto projects waned remarkably in the second quarter (Q2). According to crypto fundraising database Dove Metrics, total VC funding for crypto projects in June was $3.67 billion, down 18 percent from May’s $4.45 billion but up 60 percent from a year ago. VCs funded 191 open crypto projects in June, down 15 percent from May.

Nonetheless, investors remain optimistic about crypto’s long-term prospects. “In general, there is a big difference between people who are on the surface of understanding this space – these funds can take a backseat – but true crypto-native funds with conviction will continue to invest heavily,” Saurabh Sharma, chief investment officer at Jump Crypto, explained to TechCrunch at the beginning of June. “This is the time we find the best long-term entrepreneurs.”

But there is no escaping the reality that financing conditions are much tougher this year across most of the world than in 2021. Target companies must show profitability and growth prospects more clearly before investors throw large sums at them. “These companies, including us, should focus more on the path to profitability,” Yorick Naeff, CEO of Dutch broker Bux, told Financial Times June 24, adding that his firm was considering postponing planned fundraising rounds. “If you’re organized in a way that’s only focused on growth … you’re going to have problems.”