Fintech investment isn’t dying. It’s changing.
Good morning, and welcome to Protocol Fintech. This Tuesday: what fintech VC looks like in 2022, Coinbase under fire from the SEC and CFTC Commissioner Caroline Pham’s take on crypto.
Taking stock of fintech startups
Rising interest rates and inflation continue to rock fintech and, along with it, VC investment in the sector. PitchBook shared a sneak peek of its forthcoming Q2 fintech report with us, and it shows that private-company investment hasn’t been immune to the forces savaging public-company valuations. But the data also reveals a more nuanced picture of what’s happening to fintech startups.
Think evolution, not apocalypse. If you were only reading Twitter, you might think venture capital funding was frozen over. In reality, VC firms are cutting about the same amount of checks, but with smaller dollar figures.
Fintech companies raised about $29.3 billion across 1,233 deals in the first quarter, and about $21.1 billion across 1,227 deals in the second quarter.
Many VCs say they’re shifting toward investing at an earlier stage. And early-stage investors are considering investments with a potential recession in mind. “We’re evaluating newer companies as to how agile they are and how they’re planning to operate in this market over the next couple of years,” said Flourish Ventures managing partner Emmalyn Shaw.
According to PitchBook, the median angel or seed deal jumped from $2 million in 2021 to $3 million this year. Growth-stage rounds, meanwhile, were basically flat, dropping from $20.2 million in 2021 to $20 million in 2022.
Fintech investment is still riding high. 2021 may have been an anomaly, with $121.6 billion raised, but 2022 investment in the sector is still historically strong.
In all of 2020, fintech companies raised $47.9 billion, about $2.5 billion less than the first-half total for 2022.
Exits are another issue, however. Fintech companies scored nearly $332 billion from blockbuster IPOs and other deals in 2021, according to PitchBook. In 2022, the IPO window has mostly slammed shut, and public companies with sinking valuations have less stock to splash around on deals. Exit values for the first half of 2022 totaled around $13.3 billion. Exit values in 2020, for comparison, were about $37.6 billion.
That’s another reason why early-stage deals are more attractive than late-stage right now, since those smaller, younger companies can wait out current market conditions.
The global game is shifting. Until 2020, most of the largest fintech venture capital deals were in China. Now deals are diversifying across Europe and Latin America.
China’s shifting policies on tech and private sector investing, combined with industrial uncertainty due to lockdowns, have chilled venture investing in the country. Though Sequoia China just closed a $9 billion fund, it’s an outlier. Smaller firms including Genesis Capital, Centurium Capital and Xiang He Capital are struggling to raise, the Financial Times reports.
Meanwhile, Latin America has become a testing ground for neobanks, cross-border payments and other tech-enabled financial services designed to serve a young, growing and relatively underbanked population. On-trend investors call it the “LatAm thesis.”
European companies have received more checks in recent years, too. Rounds for Checkout.com, Trade Republic and Klarna helped boost the European numbers in PitchBook’s data.
There are other findings in PitchBook’s data, which will come out in a full report next month. Investments appear to be shifting away from consumer-facing products, after sky-high valuations for categories of businesses like “buy now, pay later” fell to surprising lows. More investment is going to business-to-business payments, by contrast. The kind of fintech that will garner investment in 2022 looks different from a successful fintech even a year ago. But there’s still plenty of money in the business of money.
Protocol link: https://www.protocol.com/newsletters/protocol-fintech/fintech-q2-vc