While the public market correction has been widespread, tech and fintech stocks have seen the largest declines, according to a recent report.
Specifically, the Fintech Index — which tracks the performance of emerging, publicly traded financial technology companies — was down a staggering 72% in 2022, according to F-Prime Capital’s State of Fintech 2022 report. After hitting a peak of $1.3 trillion in late 2021, the F-Prime Fintech Index slid to $397 billion by the end of 2022.
Currently, the Fintech Index comprises 55 companies across B2B SAAS, payments, banking, wealth and asset management, lending, insurance and proptech.
“The biggest shift in 2022 was that public investors for the first time got to weigh in on fintech stocks,” said David Jegen, managing partner of F-Prime Capital. “That was probably not super great timing considering the broad macroeconomic impact on tech.”
The fact that so many fintech companies even went public was a big deal in and of itself, Jegen said. “We had 10 years of exciting fintech disruption, all of it led by private investors,” he said. “So 2021 was huge because the IPO window was open when we had a really mature cohort of fintech companies.”
Indeed, 75 fintech companies went public in 2021, meaning 2022 was the first year that F-Prime could even put together a Fintech Index.
Notably, the decline was especially pronounced for the 10 largest exits during the peak years of 2020-2021. In other words, the bigger the exit, the larger the decline. The cumulative market cap decline for the top 10 recent exits totaled over $220 billion; Coinbase, NuBank, Robinhood, SoFi, Affirm and Wise all saw their valuations tumble.
Consistent with other research, companies in the B2B SaaS and payments spaces suffered the least negative impact. Proptech, insurance, lending, WAM and banking (in that order) experienced the greatest declines in market cap. Hit particularly hard were Dave, Coinbase, Oscar, Opendoor and Affirm.
But on the bright side, despite the valuation correction, Fintech Index companies continued to grow: Collective revenue was up about 15% from $136 billion in 2021 to $155 billion as of the third quarter of 2022. And even scaled fintechs such as Bill.com, Adyen, NuBank, Toast and Wise are still growing at high rates.
What is startling, though, is that while fintech companies enjoyed historically high valuations in 2021, they have now fallen below historic mean valuation multiples. And, contrary to what one might expect in a parched IPO market, fintech M&A volume dropped from about $350 billion in 2021 to about $116 billion in the first three quarters of 2022.
Also notable: Less than 25% of Fintech Index companies were profitable over the last 12 months — mostly payments businesses. But almost half of the Fintech Index companies expect to be profitable over the next 12 months.
Other key findings from the report:
- In 2022, public investors re-appraised many fintech companies and shifted their valuation multiples from SaaS to traditional financial services businesses, with a 71% drop in average multiples.
- Fintech companies enjoyed historically high valuations in 2021, but fell below historic mean valuation multiples in 2022.
- Though significant acquisitions occurred, overall M&A volume dropped as buyers and sellers adjusted to new valuation expectations.
- Like the incumbents, banking and wealth management startups that hold customer cash balances or float are benefiting from recent interest rate hikes.
- Of the companies that exited after the start of 2020, proptech and insurtech startups have seen the largest declines in valuations.
- Fintech companies obtained historically high valuation multiples in 2021; these multiples declined in Q4 2021 and into 2022.
Naturally, public market corrections directly affect the private markets, starting with later-stage financings. Some fintech breakouts have raised “stunning” down rounds, according to PitchBook data and F-Prime analysis, including Stripe, Klarna and Checkout.com.
“The key message was that private investors had largely valued fintech companies as tech companies, and public investors valued them largely as financial services businesses, and there is a lot of nuance in that,” Jegen said. “I’d say that was the major reappraisal that we witnessed.”
Now, he said, investors are trying to determine which companies are actually innovating as opposed to improving upon existing technology. “The one distinction that investors are now making is what’s a truly disruptive model and what’s more of a traditional and a better version of an incumbent model,” he said.
“I think 2022 was the calm before the storm that will be the second half of this year. We’re really only beginning to see the ripple effects in the private markets of the 72% drop in valuations we saw in the public markets.”