The global FinTech sector is experiencing a significant decline in funding. While people feared Covid-19 would impact funding, 2020 and 2021 all proved to be some of the strongest years for funding. However, it looks like the current financial landscape has taken a dip.
WealthTech investment and deal activity are both on the decline. European WealthTech experienced three consecutive quarterly drops in both deal activity and investment. During the third quarter of 2023, WealthTech deals in Europe reached a total of 30, marking a significant 41% decrease compared to the second quarter of the year. In terms of funding, European WealthTech companies raised a combined total of $207m in Q3, a 34% drop on Q2.
Commenting on the drop in funding, Professor Iain Clacher, Professor of Pensions and Finance, Leeds University Business School at the University of Leeds, noted this is a wider issue and not just exclusive to WealthTech. He said, “WealthTech funding is definitely down but this is not unique to just this area of FinTech. With the change in economic conditions, from a near zero interest rate to what might be thought to be a more “normal” interest rate regime, coupled with persistent inflation, then the funding landscape has changed dramatically. We can see this, not just in fintech but across the start-up and scale-up landscape. The economics are now fundamentally different for providing venture funding. “
Echoing a similar sentiment, Daniel Harman, founder and CEO at Darksquare Capital, also sees this as a FinTech-wide issue. He said, “I think VC funding on the whole has slowed down since the peaks of 2021, and WealthTech isn’t immune to that. There’s definitely still demand for investment and WealthTech products from consumers, so as long as that demand stays high, funding should follow.”
However, one reason for the drop in total capital invested could be due to smaller deals being made. Harman added, “We’ve seen a lot of interest from Angel investors in the WealthTech sector, I think primarily because WealthTechs are often looking to solve problems faced by Angel investors themselves, so they understand the pain points whereas they might not feel as close to B2B SaaS companies, for example.”
Sectors across FinTech are feeling the struggle, with global deal activity down 46% in H1 2023 YoY. FinTech Global’s research has found that lending technology deal activity is set to drop by 15% YoY and investment volume could be down 46%. InsurTech is in a similar position in terms of funding, with just $1.8bn raised in the first six months of 2023. If the second half of the year matches this investment volume, it would fall significantly short of the $6.5bn that was raised in the whole of 2022. However, on a positive note, InsurTech deal activity is projected to increase by 1% this year. Finally, the RegTech sector has also show signs of reduced activity. FinTech Global’s research found that deal activity is on track to reach 374 deals in 2023, which would represent a 27% drop YoY.
While the turbulent financial landscape of the past couple of years that has been hit with recessions and wars are likely making an impact on the funding, Harman also suggests it could be a case of a new investment model from firms.
Investment into the FinTech sector was getting into extreme levels. Just looking at the WealthTech sector, investment reached a colossal $24.9bn in 2021, a significant jump from $9.2bn in 2020. Even 2022 proved to be a strong year, with over $10bn raised by WealthTechs. The drop in funding for 2023 could be investors rethinking this strategy and being more focused with their money.
Harman said, “I think the traditional VC model of burning huge amounts of cash to grow at all costs is less popular (and less feasible) now and companies are starting to focus on being profitable more quickly and bootstrapping where possible. This obviously means that early-stage start-ups will struggle to grow as quickly as VC-backed companies could in the past, but ultimately, the ones that are able to attract and retain customers and generate revenue whilst staying lean should eventually be able to attract funding, it might just be at a later stage in the journey than it would have been a few years ago.”
If there is less money going into the sector, it does mean there is a chance some companies might not survive. Clacher added, “Typically, what we would expect to see is WealthTech companies with strong fundamentals are going to survive and those, where the investment was based on the cost of debt and finance being at historic lows, will struggle but some will not survive. Businesses will need to have a much nearer route to profitability, as that is what the economic environment dictates.”
The 2020/2021 outliers
The pandemic years proved to be an unprecedented period. Workplaces adopted hybrid working cultures, consumers tried to fight investors through by buying Gamestop shares, and the world was hit with crypto and NFT hype.
As mentioned, the WealthTech funding hit colossal heights in 2020 and Harman believes a lot of this is down to many WealthTech companies getting lost in the crypto and NFT hype. This caused high levels of capital and “absurdly” high valuations. He said, “I remember attending conferences focussed on fintech when we first started out and around 70-80% of the other attending companies had some kind of Web3/NFT/DeFi link. The thinking was almost ‘Web3 first, business case second’.
“I feel like as a result, some of the more traditional FinTech/WealthTech companies flew under the VC radar to an extent, but I think it’s forced companies to focus on staying lean and being profitable, which is a good thing.”
As we get near the end of the year, it is time to look forward to 2024. It is impossible to know how the year will shape put, but as the global financial market continues to stabilise it raises the question of whether funding will ever reach the same heights it once did.
Harman said, “I think funding will be higher when compared to 2019 and earlier. In my opinion you need to treat 2020 and 2021 as outliers and not really use those years as benchmarks. We had the combination of COVID forcing everyone online and at the same time huge quantitative easing from governments worldwide which pushed equity (particularly tech) markets higher, so it doesn’t really make sense to compare ‘normal’ times to that time period.
“There’s a lot of economic uncertainty right now, which naturally leads to investors being more risk averse, and with early-stage startups being a high-risk investment area it makes sense that investment has slowed down. Hopefully as inflation continues to come down, we’ll see investment pick up in 2024.”
In a similar vein, Clacher was also sceptical that WealthTech funding would ever go back to its pre-2023 levels. He concluded, “Going forward, this is arguably the first major shift in market conditions that Fintech and WealthTech has experienced, and those businesses that thrive in this environment are going to be the ones that grow. The funding landscape is unlikely to return to the highs we saw pre-2023. While there will be finance available for businesses that survive and continue to grow, we will not see the types of investment terms we did previously. Now, valuations are likely to be more anchored in business fundamentals as opposed to too much cash in the system.”
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