Fintech funding continued its downward spiral in the second quarter—and gave no indication of bottoming out. Fintechs must hunker down, trim fat from their operations, and refocus on their core value propositions.
In the short term, fintech funding has plunged—down 23% year over year (YoY) in the first half of 2022. Total fintech funding rests at $50.7 billion for H1, per CB Insights. A perfect storm of factors has cooled fintechs’ funding frenzy, including steep inflation, rising interest rates, the war in Ukraine, and fears of a looming recession.
The longer view is more of a mixed bag. Funding for this year has already topped 2020’s total. And VCs are building up their war chests: North American funds have added $88 billion in the first half of the year, nearly 70% of last year’s total fundraising, per Refinitiv data cited by TechCrunch. But large fintech investors Tiger Global and SoftBank both recently signaled they will be slowing investments for the rest of the year, per TechCrunch.
It’s unclear when the cash crunch will end. Public fintech performance since the start of the year has been dire: Coinbase, Upstart, and Affirm’s cumulative market capitalization has fallen by more than $70 billion this year through July 15. But “it can take over six months before we see what impact the public market downturn has had on venture funding,” per Andreessen Horowitz (a16z) partners Justin Kahl and David George. And many VCs, including Sequoia, expect the stock market downturn could be long—unlike the steep V-shaped recovery during the first year of the pandemic.
The bigger problem is that funding is becoming more expensive. Fintech valuations have plummeted. Raising $100 million at a $1 billion valuation entails giving up 10% of a startup’s ownership, but raising the same amount at a halved $500 million valuation requires giving up twice the equity (20%).
Here’s what funding and valuation drop-offs mean for fintechs and investors.
The funding crunch is hitting every fintech category, but each one feels the effects differently.
Neobank funding has disappeared. Funding to banking fintechs dropped 57% quarter over quarter (QoQ)—more than any other subsector broken down by CB Insights—and 77% YoY. The pullback from neobanks is partly explained by their inability to produce profits: Fewer than 5% are estimated to break even, per a report from Simon-Kucher & Partners.
Buy now, pay later (BNPL) providers are taking steep valuation cuts. Both public and private BNPL providers are taking hits. Klarna raised its latest round at a $6.7 billion valuation, an 85% drop from last year’s high. Affirm’s stock price had plunged 76% year to date by mid-July.
The crypto winter is putting the freeze on startup growth. The crypto market cap now stands at $1 trillion—compared with a record $3 trillion in November 2021. Plummeting crypto prices will test crypto startups—BlockFi, Crypto.com, Gemini, and Coinbase have all announced cost cuts—and limit investor appetite to back them.
Later-stage fintechs are finding it harder to lure in top investors and close megarounds. Both a16z and Tiger Global have dialed down late-stage investments, per CB Insights, while megaround funding fell 45% QoQ. Mature fintechs can no longer raise large sums without a clear path to profitability.
What should fintechs do?
Weathering the storm will require cost cuts, a singular focus on offering products that can bring in money, and securing good deals for external funding. Here’s how fintechs should approach these priorities:
Read more: A series of our reports delve into the short- and long-term changes we see amid market turbulence for neobanks, BNPL providers, stablecoins and cryptos, and insurtechs. You can access them here:
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