‘There’s less noise’: How investors are coping with the fintech downturn

After a grueling year for London’s fintech scene, the Holly Jolly Tech Party earlier this month suggested there were still reasons to celebrate.

Over cocktails and breaded prawns, investors and entrepreneurs weathering the downturn, job cuts and fundraising headaches admired the city’s skyline from a rooftop bar above Leicester Square.

The event, and others like it, reflect a continued appetite to cook, shake hands and sniff out investments – at the right price.

“We just came out of COVID and people want to meet again in person,” said Stephanie Choo, a partner at Toronto-based investment firm Portage Ventures, over a video call. “Investors also usually want to make deals.”

A quiet summer gave way to boardroom conversations about budgeting ahead of the new year, “trying to find the right balance between obviously still needing to grow, but being cautious,” says Choo.

Investors like her don’t want to miss out on the “generational opportunity” presented by the current crop of startups, even if deals are taking longer than a year ago, when fintech was among the hottest sectors for venture capitalists.

Funding globally for financial technology firms — often abbreviated to fintech — broke several records last year, with fintech start-ups taking $1 out of every $5 from venture capital firms, according to CB Insights.

This year, however, there were signs of cooling and consolidation taking investment back to 2018/2019 levels, according to European investor Finch Capital.

The number of fintech start-ups created in the region fell 80% from the previous year, falling further from the peak set in 2018.

Initial public offerings fell 70%, Finch said, partly reflecting a market-wide drought in stock market debuts.

Venture capital firms such as SoftBank and Tiger Global Management have felt the sting of falling valuations, as their portfolio companies attempt to pivot from breakneck growth to profitability.

Nevertheless, there is an appetite for deals after the “impressive growth, perhaps overheated” in 2021, according to Finch. Investors in fintech have a record $28 billion in unused capital.

“The shift has been in the noise level,” said Michael Treskow, partner at Eight Roads Ventures. “Last year, investing was like being at a festival. This year you are in a smaller room, where there is less noise.”

The past year appears to mark the end of fintech’s rapid growth, which was fueled by low interest rates that made financing cheap and a pandemic that changed consumer behavior.

For start-ups raising money, it was essentially a Christmas sale.

If they managed their money well, they would be fine. But if they saw it as the new normal, they were in for a rude awakening.

“Our view was always that 2021 was not sustainable,” says Blossom Capital’s Ophelia Brown. Harry Briggs of technology-focused investor Omers Ventures said this year marked a “return to sanity” and could result in a healthier funding environment for start-ups with more realistic expectations.

“A lot of money was wasted on bloated teams, expensive offices and things that don’t really matter that often can greatly slow people down. And I think startups thrive on scarcity,” Briggs said.

He believes fintech values ​​are likely to fall further.

There was a shift in tone this year from even the biggest and most bullish fintech founders.

They no longer talked about going public, while some were forced to cut back on spending.

Klarna, the buy-now-pay-later platform, announced in May that it was laying off 10% of its staff, and in July it raised a new $800 million – resulting in a valuation of just $6.7 billion, down from 45 .6 billion dollars a year ago.

Payments company Checkout.com recently cut its internal tax value to $11 billion.

Smaller startups may not be as affected by multibillion-dollar downturns, but the dramatic moves at the top of the market have reinforced a sense of caution around growth plans.

“For founders and management teams, cash and the path to profitability will continue to be king, especially in growth stages,” said Jeppe Zink, partner at venture capital firm Northzone, which invested in Klarna.

Because of this shift, the effort to make every sale profitable is now “baked into the seed,” according to Remus Brett of venture capital firm LocalGlobe.

Brett also said he encouraged the founders to build a plan based on three years of runway rather than two years before raising again, given the financial uncertainty.

It’s not just gloom and austerity.

Michael Sidgmore, a partner at San-Francisco-based Broadhaven Capital Ventures, just finished a three-week trip in Europe to weigh up deals.

He rounded off the visit with a trip to a tin-lined pub in London’s West End, to watch the World Cup match between Morocco and Spain, and to discuss the divergent fortunes of start-ups and more established firms this year.

While late-stage funding has fallen and unicorns have fallen to their lowest level since 2020, early-stage investment is on the rise, says Sidgmore.

He remains excited about the European fintech ecosystem, and there are still “a lot of high-quality companies solving big problems out there.”

Some companies have been keen to point to other silver linings.

At Accel’s fintech summit in December, partner Luca Boccio said that while fintech has been hit hard, the sector is increasingly a dominant part of the tech ecosystem.

His firm found that over the past decade, more than $200 billion has flowed into fintech across North America, Europe and Israel, with much more to come.

The past year could be a pivotal moment for the sector as it matures, some investors believe.

More dollars are going to niche areas like fintech’s infrastructure layer, which has certainly created work for Julia Andre, partner at Index Ventures.

It’s now a buyer’s market, said Andre, who recently spent time with entrepreneurs in Estonia. Her philosophy is that challenging times mean companies need to focus on what’s important.

“Historically, we’ve seen great companies being built in these times,” she said.