- Fintech funding has been on a decline from 2021’s peak levels, but VCs see signs of a rebound.
- B2B fintechs and earlier-stage startups are the likeliest to see benefit.
- Four VCs outline the ‘new normal” and the kinds of fintechs they want to back.
VCs are itching to get back to dealmaking as they see early signs of a rebound in the fintech industry.
Fintechs were red-hot in 2021 as investors pumped $140 billion globally into the ecosystem. But throughout 2022, the tap of free-flowing capital turned into a drip as interest rates rose and the tech markets tanked. Funding in 2023 continues to slide — investors allocated less than $8 billion to fintechs in the second quarter, according to CB Insights. It was the lowest level of funding to the sector since 2017.
Cash-strapped founders who didn’t want to fundraise in a down market and get valuations slashed are running out of options and time. Startups tend to fundraise 12 to 18 months after the market turn, even if they were hoping to hold out for longer, Mark Peter Davis, partner at Interplay, told Insider.
“They wanted to wait it out longer, but they don’t have a choice,” Davis said. Startups could be forced to look for funding options as soon as this fall.
Investors, who were waiting for founders to budge, are now getting ready to deploy capital on their terms. The rebound in funding, however, won’t likely benefit later-stage and consumer-facing fintechs, which dominated the market in recent years. Insider talked to four VCs who outlined what types of deals they’re prioritizing and what part of startups’ pitches they’ll be scrutinizing.
“We’re still early, getting toward the check-writing side of things,” said Tripp Shriner, managing partner, and fintech investor at Point72 Ventures.
If 2021 was a founder’s market, this new investing landscape will shift the power back toward VCs.
“Before, founders could really ask for almost anything they wanted in terms of control, and now they have to give up more control,” Robert Ruark, KPMG financial services strategy and fintech leader, told Insider.
“All of that is more balanced, to the advantage of the venture capital firm,” Ruark added.
Late-stage and B2C fintechs likely to bear the brunt
Fintechs that sell to businesses (B2B) are more likely to fare better than those that sell to individual consumers (B2C), VCs told Insider.
B2C fintechs, like Chime and Affirm, provide traditional financial services in a modern and convenient way. They dominated the fintech market in the past several years, but the shine is wearing off, Shriner said.
“For a variety of reasons — crowdedness, overvaluations, incumbents starting to innovate on their own — that part of the market, the digital financial services market, has kind of taken a hit,” Shriner said. “How many more neobanks or buy now, pay later names do we actually need here?”
Point72 is looking for startups solving pain points for financial firms, including scaling regulatory solutions.
As for who is driving some of the pick-up activity in the market, it’s early-stage founders.
“A lot of the increase in volume that we’re seeing is that pre-seed and seed side of things,” Shriner said. “You’re seeing a little bit more of a thawing out, where if you rewound six, 12 months ago, most people just weren’t even coming to the market,” he added.
Growth-stage fintechs, those who have raised Series C and beyond, were hit much harder than their earlier-stage peers in the downturn. Most of those later-stage companies still rely on bridges and extensions, Shriner said.
“The growth stage market has been more or less decimated by this market contraction,” Davis added. He added that crossover funds, like Tiger Global, came into the market and drove up valuations. The shift prompted other investors to move out of the market, and those that put money into the sector are weary of getting burned again, Davis said.
“Those capital markets have been really screwed up, and later-stage companies are bearing the brunt of it,” Davis said.
But, as they say, time waits for no one.
“Companies that haven’t raised and are still burning will need to raise. Many have pushed off their raises, but can’t wait forever,” Stephanie Choo, partner at Portage Ventures, told Insider about growth-stage companies.
The ‘new normal’
The days of growth at all costs, as was the case in 2021, are dead. Investors are spending the bulk of their time and money on companies proving they can generate revenue in the short term, Marcos Fernandez, managing partner at Fiat Ventures, told Insider. In some cases, that meant startups had to retool, prioritize initiatives that minted returns sooner rather than later.
And proving those financial results will be critical moving forward. Gone are the days when a founder could secure funding from a VC after only a discussion with a founder, KPMG’s Ruark said.
“We’re seeing, maybe not even a temporary shift, but a more permanent shift in how some of the VCs approach some of the companies they want to invest in,” Ruark said.
Fintech VCs will get to spend more time on due diligence, looking beyond so-called “vanity metrics,” Fernandez said.
Founders can no longer say they have, for example, 100,000 users, Fernandez said. VCs will want to know how many are active, how many are active on a weekly basis, and how they are driving revenue.
“It’s going to take more meetings than ever before to secure capital as a founder,” Fernandez said. “You need to make sure you’re prepared and ready to have three to four times as many conversations as you did one to two years ago.”
“I wouldn’t say it’s the new normal just for fintech, but for startup investing as a whole,” he added.
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