Down but not out: a shift in investment priorities is creating new fintech opportunities
In our previous article we looked at how fintech investment has fallen in response to the post-pandemic economic downturn. Some assert, perhaps a little unfairly, that sanity has replaced vanity as investors demanded profitability over growth.
The second quarter of this year saw Quarter on Quarter global fintech funding plunge by almost half to £6.4 billion – a level not seen since 2017, according to CBInsights. This is all the more staggering when held up against KPMG research showing the total value of global raises in 2021: £197.1 billion across 7,321 deals.
That said, there have still been some impressive rounds in 2023, such as the £496 million raise by AI-powered lending proposition Abound and the £206.2 million secured by e-trading platform eToro. And as far as Europe is concerned, the UK attracted half of the region’s 10 biggest deals.
We wanted to examine what investors are looking for in the current climate.
What have been 2023’s main investor trends?
Despite the challenging market conditions, there are verticals in fintech and global geographies that are showing great promise.
B2B propositions stand out in particular. Charles Birnbaum, partner at Bessemer Venture Partners, spelt this out clearly in an interview with TechCrunch, describing a “tremendous opportunity for innovation” in B2B payments.
Conversely, Birnbaum warned that life will remain hard for some B2C propositions. “Consumer fintech businesses without long-term, durable customer acquisition advantages are overhyped and will continue to struggle to live up to the lofty expectations set by investors over the past several years,” he said.
This viewpoint was supported by Boston Consulting Group (BCG)’s report Global Fintech 2023: Reimagining the Future of Finance. Released in May, it said B2B would lead the next era in growth and innovation, as fintechs serving corporate customers had “ample room” to disrupt, thanks to unmet global credit needs worth £4.1 trillion.
BCG also predicted that B2B2X (B2B to any user) would play a growing role in meeting fintech demand.
In terms of markets that are faring well, LatAm and the Caribbean experienced a 150 percent Quarter on Quarter funding increase in the second quarter of 2023. Brazil has been in the limelight thanks to success stories like neobanking sensation Nubank and ecommerce payment unicorn EBANX.
How are company growth stages affecting investor decisions?
Funders such as Seedrs and Plug and Play have reported a drop in backing for early-stage startups this year, reflecting the trend across the wider market. However, some of this is believed to be down to company founders holding off on raises ahead of a possible recovery – it’s not all about VCs reducing round values.
Alongside this, scaleup or late-stage businesses have switched their attention to cost cutting measures, such as corporate restructures, as part of a shift in emphasis from growth to profitability.
However, the pieces of the funding kaleidoscope appear to be settling with some commentators observing a rise in deals as the year end approaches. This is prompting optimism that 2024 will see an increase in fintech investment.
And on that, Judd Caplain, KPMG’s Global Head of Financial Services, says funding conditions will likely rebound once market conditions even out, but perhaps not to 2021 levels.
What can fintechs do to secure future growth and profitability?
Whether the recent plunge in funding is a new reality or a painful blip, it’s vital that fintechs continue to prioritise sustainable growth.
A big part of this involves preparing for regulation and changes to the retail payments ecosystem in 2024. In the UK, it’s expected that new rules governing cryptocurrencies and digital assets will be enacted and Pay UK’s New Payments Architecture will replace the current multilayered infrastructure.
Startups planning funding rounds should also be mindful that investors are strengthening due diligence, so it’s more important than ever that founders know their businesses inside out.
For example, prospective backers may want to evaluate data breach and cyber incident records, as well as assess approaches to compliance in an increasingly regulated sector.
It’s also important to demonstrate efficiency in operations and tech adoption, an ability to make a profit (now or very soon in the future) and a well thought-through strategy to raise the profile of the business using integrated marketing tactics.
Ecosystem partners matter too. CEOs should be benchmarking modular tech providers against functionality, performance, cultural alignment and innovation appetite. Ambitious leaders need suppliers capable of supporting their visions.
That said, businesses should be mindful of jumping into bed with unproven tech partners, some of which may lack the ability to support growth in customer and transaction volumes.
Will 2024 see a renaissance in fintech funding?
In today’s unceasingly volatile world, it is more difficult than ever to know what the future will bring. But what is clear is that the appetite for a new era in fintech innovation is growing as 2023 draws to a close.
Areas such as B2B payments, fraud prevention, KYC, AI and blockchain technology will almost certainly see an increase in activity, as a new era gets underway.
But whatever direction the sector takes in 2024, the following words by Juan Alonso-Villalobos, Fintech General Partner Startup Wise Guys, will remain relevant:
“Investors seek founders who know their business model and can clearly explain their ideal customer persona, anticipate the sales cycle, design an effective sales funnel, and be aware of the legal framework in the geographies they operate. If founders can convince investors that their service or product is significantly cheaper and faster than competitors, they are more likely to attract investment.”