A ray of fintech sunshine?
Fair greetings upon you, and welcome to Protocol Fintech. This Friday: signs of optimism among fintech investors, Jack Dorsey vs. the CCP and the CFPB’s coming crackdown on financial data.
A ray of fintech sunshine
If you work in fintech, you don’t need anyone to tell you the news has been full of doom and gloom the past few months. We’ve contributed our share, noting that venture capital funding has been down after a record year and layoffs are rampant. Regulation is dropping the hammer on lending, interchange and crypto trading. Rising interest rates, inflation and international conflict only make the future look more uncertain.
All those headwinds might make it seem like a bad time to be in fintech. But many investors and founders say the opposite — that this is a great time to be building in the field. We spoke to several about what’s giving them hope.
Fintech funding is far from dead. Sure, valuations have taken a hit, but deals are still being made — particularly for fintechs that have found a way to differentiate themselves from the pack.
According to PitchBook’s second-quarter fintech report, there were 1,103 venture capital deals this quarter. More checks were cut in the first half of 2022 than in 2019 or 2020.
There’s also a shocking amount of money ready to work in venture capital right now. As of June 30, American VC funds had already raised over $120 billion. There are so many new venture funds, one news outlet started compiling a list. It’s long.
Sure, VC funds take years to be deployed, but even investors admit they can’t just twiddle their thumbs and wait to invest forever. “VCs are sitting on record amounts of dry powder, which means they can only sit on the sidelines for so long before deploying back into the ecosystem,” Cambrian founder and solo general partner Rex Salisbury told Protocol.
Finix said it just closed an up round. (It’s telling that the startup felt it needed to clarify that point.) Farther, Forage and SecureSave are only a small sampling of other fintech companies that have successfully fundraised recently.
A slowdown might provide more opportunities for innovation. “Entrepreneurs are identifying market needs that connect to broader, more significant cultural gaps,” Mirza CEO Siran Cao told Protocol. Harder times could mean work that matters more.
One of the biggest hotbeds of innovation is in less flashy areas of fintech, like financial infrastructure and embedded finance. Fin Capital founder Logan Allin said his firm remained “bullish” on “boring fintech.”
Venture-backed fintech startups haven’t even captured 10% of industry revenue, according to PitchBook. That’s a lot of the financial services market left to conquer.
There’s more talent than ever before. The top 225 global fintech unicorns employ over 300,000 people, and 160,000 of them are in the United States, according to CFTE.
After years of scraping to find, say, a payments engineer who understood the complexities of interchange, recruiters can now tap a wide set of candidates with the specialized skill set needed to build a successful fintech: a solid understanding of finance and economics, tech smarts and experience navigating complex regulations.
Layoffs always feel terrible. But there’s a silver lining: A lot of talented technologists and business types now have more free time. From idle talent often comes exciting new projects — think of all the new companies created by laid-off employees in 2020 and 2021, or the more sustainable tech growth that followed the dot-com crash.
This new cohort of idle entrepreneurs is better prepared than those in previous busts. “Unlike founders a decade ago, they have deep networks to recruit from to build out founding teams,” Salisbury said. Infrastructure is richer, too, with APIs not just for taking credit card payments but also issuing cards, onboarding customers, tapping into transaction data and complying with KYC regulations.
One more reason for optimism: This too shall pass. Recessions in American history are rarely prolonged — and it’s up for debate whether we’re even in one. Fintech investments are down on a relative basis, but maybe the inflated valuations of late 2021 are best left behind anyway. If founders and investors learned to cope with those, they could learn to make the most of the slowdown, too.
Protocol link: https://www.protocol.com/newsletters/protocol-fintech/fintech-investment-downturn