Global startups focused on building financial technology saw their fortunes improve last year as investors doubled, and more, the amount of capital flowing into fintech companies, measured on a quarterly basis.
The comedown from those highs took longer. But, today, looking at Q3 2022 data from CB Insights, it’s clear that the fintech funding boom is behind us; even more, global fintech funding activity is now back to where it was before 2021, indicating that last year was more aberration than new normal for the startup category.
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It’s a well-trod statistic that around one in every five venture capital dollars raised in 2021 went to fintech. It is also no huge surprise that after a heady year, fintech fundraising has fallen along with overall venture activity. But the portion of venture capital disbursement that fintech can lay claim to is also in decline.
Let’s chat through the numbers and then ask ourselves what a new valuation landscape, a changed venture capital market, and a frozen IPO market mean for fintech startups large and small. To work!
Fintech falling
It’s actually rather impressive that fintech managed a breakout 2021 in a sense, given the sector’s history of regular fundraising activity.
For example, in 2019, capital invested into fintech startups on a quarterly basis only varied from $11.6 billion to $13.5 billion, according to CB Insights data. In 2020, the numbers were quite similar, with quarterly totals ranging from $11.3 billion to $13.1 billion.
TL;DR: Through 2019 and 2020, fintech venture activity was worth between $11.3 and $13.5 billion. That’s a pretty narrow range for eight quarters, inclusive of the onset of a global pandemic.
And then there’s 2021. Capital invested into the sector, per CB Insights data, kicked off last year worth $28.4 billion in Q1 and rose to $38.7 billion by Q4.
This year, things came down from those highs:
- Q1 2022: $29.7 billion
- Q2 2022: $20.9 billion
- Q3 2022: $12.9 billion
As you can see, the third quarter of this year saw fintech fundraising activity return to what was normal in 2019 and 2020. Even more, in the third quarter, CB Insights counts $74.5 billion of total venture activity, meaning that fintech took up 17.3% of the total, closer to one in every six dollars (16.66%) than one in every five (20%).
We cannot, and should not, cry for fintech startups. They had a simply excellent 2021 and should be largely skating along this year on a wave of capital that they raised when it was easy to do so. And with around $13 billion in capital made available quarterly even now, there is still plenty of money floating around.
Perhaps not for every fintech company, however. The amount of capital raised in so-called mega-deals, venture rounds worth $100 million or more, is falling, making up a somewhat modest 40% of all funding activity last quarter, again per CB Insights. That was down from percentages in the high 50s and low 60s in 2021; there are fewer huge deals out there, and late-stage fintech startups may find themselves competing for a smaller number of big checks. Given how many fintech unicorns there are, a decline in unicorn fodder — mega-rounds, more or less — sounds troubling given that other fundraising channels are out of favor at the moment.
M&A is likely tough given the high 2021 valuations stapled to many fintech startups, a fact exacerbated by share-price declines at many potential acquirers like Block and PayPal. And the IPO market is kaput for at least another quarter, it appears. That leaves debt — now more expensive thanks to rising rates — and, well, venture capital.
If I was to stick my neck out and take a stab, I think that the earlier-stage fintech startups are in better shape in the next year to raise. Not at 2021 prices, mind, but the early-stage markets do appear to be slightly healthier than the later stages. We need to munch more data to fully confirm that, but if you are building a seed-stage fintech company, I wouldn’t worry too much.
If your fintech unicorn, however, is currently sucking down millions per month in burn, your last price was set during the 2021 peak, and you can’t go public in early 2023 for whatever reason, I’d fret.