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  • Writer's pictureVeronica Irwin

The fintech bust, reconsidered

Good morning, and welcome to Protocol Fintech. This Monday: New York’s mining moratorium, the wait for the big crypto bill, and India’s go-slow approach to digital assets.


Don't panic (much)

Just scrolling fintech Twitter is enough to give you whiplash. Crypto’s gloom is casting a pall on the broader fintech world, along with the shaky economy, crashing stocks and rising layoffs. But is the apocalyptic mood overblown?

VCs agree that founders should tighten their belts, but they’re unhelpfully vague on whether that’s for a few months or a few years. Talk to startup CEOs, and they’ll blame the economy or, discreetly, acknowledge that some IPOs were frothily overpriced.

When there’s so much chatter, I find it useful to talk to someone whose job it is to just crunch the numbers, not place bets. So I called Robert Le, a fintech analyst at PitchBook, to extract some signal from the noise.

Le said fintech valuations are falling because public markets see the companies as more “fin” than “tech.” The industry is coming to terms with the fact that the broader public doesn’t see these companies as worth the kind of multiples software companies get.

  • Before last year, there weren’t many public fintechs, period. $329.4 billion more was made in 2021 fintech exits than in 2020, and the vast majority of that money was made in IPOs, according to PitchBook.

  • That was a nice haul while it lasted. The valuations of most fintech companies that went public in 2021 have fallen by double digits.

  • Le likes to look at the F-Prime Fintech Index, which tracks fintech companies against cloud services, the Nasdaq and the S&P 500. Fintechs are doing a lot worse than cloud companies, which supports his point about “fin” versus “tech.”

An increase in M&A looms on the horizon. Private fintechs will need more money soon, and if they can’t get it from VCs, Le said their only options are to “go out of business or sell.”

  • Le said the report that Klarna was raising money at a 33% haircut was a big indicator that fintechs are struggling to raise.

  • Who’s up for sale? Private companies’ cash flows aren’t widely available. But one proxy Le looks at is whether a company that’s post-series has raised since mid-2020. Venture funding rounds are typically meant to give 18 to 24 months of runway. If that’s running out, a sale is all but inevitable.

  • Who are the buyers? Public companies with a lot of capital, or private ones that raked in big late-stage rounds. Le named Stripe as an example of the latter. Le also thinks traditional financial services companies will be looking to make acquisitions now that targets are more affordable. I saw some banks on the prowl at Finovate last month.

Not to go all “Battlestar Galactica” on you, but all of this has happened before, and all of this will happen again. VCs were giving very similar advice to tech companies in the spring of 2020 as they are now — and 2020 turned out to be nothing like 2008.

  • Sequoia’s Black Swan memo was the most memorable false alarm. Initialized was warning founders, too. There’s another boom in bearish advice now.

  • Running the numbers, Le pointed out that there’s one big difference between now and the last real recession: There’s a lot more dry powder than there was 14 years ago. In Pitchbook’s Q1 VC valuations report, the firm pointed out that of $230 billion available at the end of 2021, only $74 billion was invested in the first quarter of 2022. Even with Tiger and SoftBank getting cold feet, there’s lots of cash ready to invest in private equity, too.

Le warns that there are still a lot of unknowns. Another quarter of earnings reports will give a far better read on how the economy is affecting fintechs’ core businesses. At the risk of sounding like a vague VC: Founders should plan for the worst, and hope for the best.

— Veronica Irwin (email | twitter)

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