How the coronavirus could impact FinTechs and their funding

February 4, 2020

Companies needing to raise capital in the next three to six months will suffer a drop in valuation due to the coronavirus pandemic, according to a new report from venture capital firm Finch Capital.

The coronavirus has played havoc with the world and businesses are currently in a very tough situation. Startups and early-stage companies are most at risk if growth stalls or drops over the coming three to six months, a new report from Finch Capital claims.

The report covers the FinTech industry and the short-term impact of the crisis. It also explores Â structural implications post-crisis and how it will translate into an ever-swifter adoption of digitalisation. Finally, the report examines the landscape in terms of growth, unit, economics, consolidation, funding dynamics and exits.

With the uncertainty on the market, venture capital firms may start to hold off on making investments. Companies cannot simply hold-off raising funds and when times are tough like they are now, they may need to raise more than ever. However, when going to the fundraising market, their valuations could suffer.

Finch Capital managing partner Radboud Vlaar said, â€œOverall we see investments demand remains strong as the demand and case for digital remains very strong. Valuation wise we expect more late stage valuations to drop, and for those companies in funding need next 3 to 6 months. Valuations have already coming down, however in general would say that we see most growth and VC investors focused on the existing portfolio and being in general very selective in new investments, so volume during crisis will come down faster than valuations.â€

While it may look bleak at the moment, Finch Capital believes that post-crisis venture and growth will remain strong due to the sheer amount of capital in the market. The coronavirus pandemic can only last so long and once it has been calmed, it could have long lasting impacts on the world. The new conditions it could create could favour increased momentum and growth and release a â€œvirtuous cycle for FinTech companies.â€

However, this is still a distant dream. Finch Capital believes that FinTechs will be in crisis mode until Q3 2020 and then put in recovery mode for the next 12 to 18 months.

There are two main challenges facing FinTechs at the moment, according to Vlaar. The first is cash and fundraising for companies with three to six month runaway, which will struggle raising funds from new investors. The second problem is longer B2B sales cycles and delayed closings requiring a shift to remote sales.

It is not all doom and gloom though. The report suggests digital-only banks will become the new industry norm and there financial institutions will look to partner with FinTechs to accelerate their digitalisation, instead of attempting to build it in-house.

There are a number of FinTechs which could become â€œwinnersâ€ from the coronavirus. These include consumer and SME lending platforms which are swiftly and efficiently able to deliver capital to key segments of the economy.

Mortgage and life insurance digital solutions will also be able to succeed by disrupting the role of intermediaries which often rely on face-to-face interaction.

Vlaar concluded, “2020 will be challenging for FinTechs to navigate, but there are better times ahead. Post-crisis, disruptive winners will â€œtake allâ€, as we expect surging demand from financial services for technology to master digital-only interaction, enabled by AI and big-data analytics.”