How fintech investments fared in Q3 2022, in 4 charts – Tearsheet

Fintech continues to find itself in troubled waters, with contracting venture capital and increasing layoffs. The global recession-bound economy, record high inflation and the war in Ukraine have created an atmosphere in which the industry is stripped of cash.

Some in the industry expected better from 2022 after a record 2021, where one in five VC dollars was invested in fintech. Although it can be argued that the joys of last year were not necessarily correlated with strong business fundamentals, and the circumstances that followed could be a threat to fintech’s growth trajectory.

Dealroom’s recent report on fintech financing in Q3 2022 shows it in numbers.

Since last quarter, the public market for fintech investments has fallen sharply to pre-pandemic levels, and at a more steady pace the private equity market is also following suit. This does not mean that the progress of the last couple of years has been undone, but alarm bells are ringing.

In Q3 2022, fintech startups raised a total of $13.3 billion globally. For reference, that’s 64% below the industry’s record high of $37 billion in Q4 2021. Annually, fintech funding is down 62%, from $35 billion in Q3 2021.

Q3 2022 has also seen healthcare overtake fintech as the most invested industry worldwide. While healthcare itself has seen a 35% decline in capital inflows, fintech’s decline of 62% is significantly higher. As a result, investments in health were $16.7 billion, compared to $13.4 billion in fintech.

As the global chip shortage continues, understandably the only industry to see an increase in investment has been semiconductors, up 28%.

Within fintech, investments in all verticals are down from Q2 2022. The biggest hits were taken by financial management solutions (66%), regulatory technology (61%), wealth management (50%), banking (44%), payments (43%). %) and crypto (40%). Insurtech has shown some semblance of resilience, with no decline in funding.

However, payments remain the most popular sector among investors, with inflows of $3.4 billion in the quarter. This is followed by crypto and DeFi, with $2.8 billion in funding, and insurtech with $2.1 billion.

Many in the fintech industry have argued that this drop in funding is the industry reorienting itself. The funding level in 2021 was simply unsustainable.

Scarlett Sieber, head of strategy and growth at Money20/20, echoes this sentiment. According to her, “too much money” was invested in fintech during 2021, and what is happening now is the industry itself “level setting”.

The drought funds have hit newer startups more than those that have just started. Data shows that the median ticket size for funding for Series B rounds and beyond has dropped drastically. In contrast, series A rounds have shown greater resilience, while seed funding has actually increased.

Oh, in Q3 2022:

• Median seed funding has seen a 33% increase, from $2.4 million in Q3 2021 to $3.2 million in Q3 2022.
• The median Series A funding has fallen over 6%, from $10.9 million in Q3 2021 to $10.2 million in Q3 2022.
• Median B funding has fallen by a significant 46%, from $37 million in Q3 2021 to $20 million in Q3 2022.
• Median funding for Series C+ has declined nearly 62%, from $91 million in Q3 2021 to $35 million in Q3 2022.

This is a clear indicator of VCs’ newfound focus on profitability – which expects to see fintech reach that goal far earlier than they did in the past. In the world of early fintechs, VCs still have their eyes on the next big idea.

This is most evident when you look at how mega-rounds have decreased considerably.

Global mega-round funding in Q3 2022 totaled around $5 billion, down from $13.6 billion in the previous quarter. This figure is down 79% from the peak in Q4 2021.

Alarmingly, Tiger Global, the largest fintech VC investor globally, has reduced its investment by 90% between Q2 and Q3 2022. After writing down its investment portfolio earlier this year, the firm recently announced that it is putting together a new $6 billion fund . This new fund is not only $2 billion less than it was originally intended to be, but also less than half of the last fund Tiger Global closed in February, worth $12.3 billion.

The firm also announced that this fund will be distributed at a slower pace, with only half of it invested in the first year. For the sake of comparison, most of their latest fund is already invested.

Other prominent fintech investors, including Sequoia, Lightspeed Ventures and Global Founders, have also drastically reduced their investments over the past two quarters.

As a result, fintech has produced the lowest number of unicorns since Q3 2020, just 7. Last quarter alone, we witnessed the formation of 28 fintech unicorns globally.

In such an investment climate, Finch Capital has argued that the fintech industry is heading towards a phase of cooling and consolidation. While adverse macroeconomic conditions can create problems for the industry, their report found that there is an abundance of unused capital just sitting there waiting to be invested. This could soften the blow for the industry.

“After many years of impressive growth, perhaps overheated, there is no doubt that a worsening macroeconomic situation and tightening of the money supply is weighing on the fintech sector. This does not mean that funding has dried up, just that investors are becoming more discerning and price sensitive. In fact, our research indicates that dry powder is at an all-time high, with $28 billion of unused capital among fintech investors,” said Radboud Vlaar, managing partner of Finch Capital.

Vlaar believes that investors’ cautious attitude will usher in a period of consolidation in the space, thereby creating a more sustainable ecosystem. Furthermore, there has always been a question of the long-term sustainability of some companies in the growth stage valuations, which had to find a painful equilibrium. The next 12-18 months will no doubt help shape this equilibrium, and with a renewed long-term focus will help mature the fintech industry.

Dealroom’s data supports the idea that the industry is heading towards consolidation. While M&A has fallen from its peak in 2021 and early 2022, it remains above 2020 levels.

More interestingly, only two fintech IPOs and SPACs have taken place this quarter. Compare that to the 28 that occurred in Q3 2021, and 15 in Q3 2020, and you see that public funding is significantly reduced.

An interesting phenomenon that has developed is that with public investment drying up, private equity investors are buying fintech firms out of public markets and into private ownership. Notable deals here include Vista Capital Partners’ acquisition of Avalara – a provider of tax compliance solutions – for $8.4 billion, and EQT Group’s acquisition of Billtrust – a provider of B2B payment solutions and AR software – for $1.7 billion.

Fintech is undeniably going through a difficult update. While a more stable and sustainable version of the industry is expected to rise over the next couple of years, businesses in the area will have to weather the current upheaval to get to the other side.