Good morning, and welcome to Protocol Fintech. This Thursday: the outlook for fintech M&A, FTX’s derivatives debate, and the luna reboot plan.
5/26/2022
The fintech world trembles
San Francisco was once the hub of global tech conferences. It’s still trying to find its footing as business travel picks up. The attendees at Finovate’s spring conference — the fintech event series’ second in-person gathering since the pandemic — had a tentative, transactional vibe: Many seemed to be diving in for one panel or one meeting and then taking off.
The sense of unease was palpable: Nobody’s quite sure whether startup funding is dead or just in brief decline, whether they need to extend their runway six months or two years or if their boss is getting ready to lay them off next week. Even as people practiced their conference smiles and handshakes, it was hard to ignore the elephant in the room — the changing funding environment for fintech.
“If you’re looking to invest, our booth is in the back.” More than 50 companies demoed their products at the conference, and more than a handful of those presentations ended with a call-out to investors.
Founders were trying to project optimism, but when I pressed some about how fundraising was going, they got skittish. The question wasn’t whether VC funding was drying up but how long the drought might last.
Plenty of investors who spoke with Protocol must have been reading from the same VC manual, which apparently has a line about how startups with good founders and strong fundamentals will do just fine. Few were willing to admit outright that the good times were gone. A pleasantly frank exception was Mercedes Bent at Lightspeed. “The growth markets are virtually closed,” she said confidently at a Finovate panel on investing.
Early-stage startups, however, are still sizzling. According to PitchBook data, early-stage VC valuations were up in the first quarter, while late-stage deal sizes fell.
A new period of consolidation might be on the horizon. If those highly valued startups can’t get growth capital, they’ll almost certainly have to sell.
Bain Capital Ventures Partner Christina Melas-Kyriazi said the divergence in valuations between the early and late stage may lead to more acquisitions. That isn’t necessarily a bad thing, she argued: Fintechs need to be multiproduct to survive, so smaller companies that help fill out an acquirer’s offerings have a good shot at getting bought.
PitchBook said in its Q1 Fintech Report that it expects VC exits to shift mostly to M&A for the rest of the year. According to the report, average deal size was down 7.3% from the previous quarter at a total of $29.3 million.
Dealroom.co said in its latest fintech report that M&A volume was at an all-time high in the first quarter, with 230 deals. But the combined value of all exits, including acquisitions, IPOs and SPAC deals, fell to $27 billion, the lowest point since the second quarter of 2020, when the economy was deep in the throes of the pandemic.
Boutique investment firm Houlihan Lokey also reported a spike in fintech M&A. The largest acquisition in its latest monthly report was Bolt’s April acquisition of Wyre for $1.5 billion. But now Bolt’s laying people off.
Financial infrastructure is all the rage. Investors are once again picking up on picks and shovels.
“The next phase is not going to be a consumer-facing digital bank, or consumer-facing crypto wallet,” Pegasus Tech Ventures partner Martin Tantow told Protocol. “Now, it’s getting more interesting for us to invest in embedded finance and banking-as-a-service.”
Fintech analyst Jason Mikula said there are more customers than ever for those startups. “You’re not only selling to other fintechs — you’re also selling to Chase and Goldman and Citi and the other, more established banks,” he said. “Your concentration risk is better diversified.”
Two of the best-attended sessions at the conference were about embedded finance. The buzzword also made it into panels about investing, lending and strategic partnerships.
Fintech seems to face a rocky future, at least in the short term. Some sectors might be more recession-resistant, especially tools that help other financial firms cut costs or deliver new products. But the most enduring aspect of the industry on display at Finovate might be the impulse for human connection. Attendees put on their best smiles and schmoozed at the Hilton Union Square from the moment the breakfast buffet trays rolled out to last call at the evening happy hours. They networked like their company’s future depended on it.
Protocol link: https://www.protocol.com/newsletters/protocol-fintech/fintech-startup-sale
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