Finch Capital ‘State of European FinTech Report 2022’ finds the biggest category in venture funding, FinTech, is entering a period of cooling and consolidation to 2018/2019 levels as macroeconomic concerns are weighing heavily on the sector. Raising funds by FinTechs is becoming more competitive and price sensitive, despite record levels of undeployed investment capital. The lack of exit market and lower demand for mega-funding puts pressure on big ticket investors to deploy funds and make attractive returns.
In its latest ‘State of European FinTech’ report, fintech venture capital firm Finch Capital forecasts a period of cooling and consolidation across the FinTech sector, as macroeconomic conditions grow more challenging. However, an abundance of undeployed Growth Capital is cause for optimism for Founders and Talent to make a soft landing.
The European FinTech sector has seen significant growth in recent years with fintech funding volume having grown from around $6 billion in 2020, to around $19 billion in 2021. The total number of FinTech exits globally also peaked in 2021 at 966. Over the same period, FinTech investment globally topped US$210 billion, with crypto and blockchain businesses performing especially well.
In their 7th State of European FinTech report, the team at Finch Capital assessed four key trends in FinTech as proxies for the health of the sector. The team assessed: the number of new FinTechs founded; volume of funding; number of hires across the industry and the number and value of successful exits.
Investor Ecosystem is Retreating to 2018/2019 levels
Finch Capital’s research reveals that, as economic conditions have become more uncertain over 2022, FinTech investment has slowed. The report shows that new business formation in the FinTech sector peaked in 2018 and, over the last year, has declined by 80%.
Since Q2 2022, Public Tech markets have come down back to 2019 levels after a strong rally since 2020, the private markets are undergoing a similar but slower transition to 2019 valuation levels, wiping out the 200-300% growth in valuations during 2020-2021.
This decline has coincided with a 70% drop in IPO and large venture M&As exit windows dry up as well as venture funding with ‘megarounds’ in particular having declined in equal measure.
In 2021, the top 20 funding rounds in Europe accounted for 50% of the market. Across the investment ecosystem, there has been a 25% decline in funds raised by FinTechs, with like any previous cycle corporate investors retreating in the face of macroeconomic uncertainty.
Caution in the FinTech market is also highlighted by a decline in recruitment, with new hire growth down 50%. Europe accounts for only 10% of total reported fintech layoffs globally, despite receiving 25% of global FinTech funding.
Cause for Optimism: A Soft Landing for the strongest FinTechs
Nevertheless, the sector is still hiring, with around 10% of FinTech firms currently advertising vacancies. Demonstrating a shift towards a less-well funded and more competitive landscape, existing vacancies are becoming more focused on revenue generation (such as sales roles), and less on technical skills such as engineering.
Dry powder is at an all-time high with $28bn of undeployed capital among Fintech investors and it is a function of when and at what terms it gets deployed as opposed to if. First signs are that these levels of dry powder are not sustainable with a 40% decline in new funds raised in 2022 vs 2021. As a result, funding is not going to dry up short term for the better companies who show healthy unit economics, opportunity and potential for growth providing opportunity for a soft landing.
Commenting on the findings Radboud Vlaar, Managing Partner at Finch Capital, said: After many years of impressive growth, perhaps overheated, there is no doubt that a worsening macroeconomic situation and tightening money supply are weighing on the FinTech sector. This doesn’t mean that funding has dried up, simply that investors are becoming more discerning and price sensitive. In fact, our research indicates that dry powder is at an all time high, with $28bn of undeployed capital among Fintech investors.
With investors becoming more cautious about where they put their money, and potentially overinvested start-ups struggling to exit, we are likely to see a period of consolidation in the FinTech space as many verticals are highly fragmented, creating a smaller but more sustainable ecosystem.
There was always an element of uncertainty around the long term sustainability of valuations for certain companies particularly at growth stages. This shake up, while painful, is also necessary. Consolidation and more competitive investment flows, combined with still significant levels of undeployed capital, will bring maturity to the FinTech sector. And, despite difficult near term prospects in the economy at large, a new normal level of activity will resume in FinTech over the next 12 to 18 months, with a focus on long term sustainability.
The full report is available on Finch Capital website: https://www.finchcapital.com/post/fintech-market-set-for-cooling-and-consolidation-as-macroeconomic-factors-bite