Fewer Fintech unicorns, more Fintech red wolves

I always thought “unicorns” were the wrong name for fintechs that reached a billion dollar valuation. After all, unicorns don’t exist (sorry kids), but fintechs like these do. They are not mythic, but they are rare. Also, they seem to be becoming less frequent. We should probably have called them fintech red wolves or fintech Amur leopards. But will they die out? I do not think.

Fintech funding down

Despite the obvious slowdown in parts of the economy, fintech is in reasonable health. While global fintech funding fell by almost half last year, it still accounted for a fifth of all funding globally, which seems to indicate that investors remain bullish. A CB Insights recently found that two of the largest global VC firms (Sequoia Capital and Andreessen Horowitz) actually backed more fintech companies in 2022 than any other category, putting around a quarter of total investment into fintech startups.

However, this does not mean that fintechs are heading for the stratosphere, and there are signs that some startups may be overvalued. In recent months, several high-profile fintech companies have seen investors reduce their investments. In April, Schroders devalued its stake in Revolut by around 46%, while Allianz is believed to be selling its stake in N26 at a valuation of $3 billion – a steep discount to the $9 billion price tag the company raised in 2021. While VC funding pushed up valuations in recent years, as of the first quarter of this year the median pre-money valuation for European fintech startups was around €19 million (according to PitchBook data). So far this year, this increase has been consistent across all stages, with the notable exception of venture growth, which saw a decline of nearly two-thirds.

Valuations are becoming, some would say, more realistic. This can be seen from the growing number of fintech deals and the falling multiples over the past year. For example, the median earnings multiple range as of Q1 was 2023 1.6x – 5.5xwhich is down nearly half from 2021. Observers seem to expect more down rounds, or flat rounds at best, as companies that raised money in the good times look to scale.

These broad surveys are consistent with my recent experiences. As someone who is privileged to sit on a few boards and advisory boards as well as advise a small venture fund, I can say that for the most part good startups continue to receive investment – in fact, in the last few months I have made a couple of pre-seed investments myself – but they the scale-up money is getting harder to come by. It will take a little longer for many good companies to get to that billion dollar valuation.

Where is the sector going next? Well, unicorns aren’t just mythical beasts roaming the fintech landscape. There are dragons out there too. A dragon is a company that delivers returns equivalent to the entire fund that invested in it and is therefore highly desirable to investors: It may not be a unicorn, but it makes more money for the fund.

I spoke with Richard Abrahams at Sprout, one of them several new platforms who helps private investors discover, invest and monitor venture and private fund investments on the “unicorns vs. dragons” debate, and he told me that when it comes to mythical beasts, it’s the dragons that deliver, and the declining number of unicorns means the search for means to find dragons is not slowing down!

Where can we find some of these dragons? Well, while the payments space attracted $53 billion, the largest share of funding in 2022, it was actually regtech that was the fastest growing segment. Investments almost doubled to nearly $19 billion, and my view of the market is that this will continue to be a focus. When you look closely at costs and benefits in financial services, the sexy front-end apps may attract attention (and who doesn’t think AppleAAPL does some amazing things), but it’s the back-end compliance that is a huge and growing boat anchor on companies across the sector. A good regtech red dragon idea will guard your company’s taxes and save more money on operations than a fintech idea can bring in revenue.

One thing that can help tip the cost-benefit scale around regtecgh is digital identity. Kirsty Rutter, Fintech Investment Director at Lloyds Banking Group in the UK points to this as a specific area where there may be increasing opportunities this year. Numerous fintech companies have emerged working to tackle various aspects of the identity challenges across identification, authentication and authorization and digital onboarding accelerated through the pandemic, but so did fraud, increasing the pressure for coordinated national and international action here. As she says “our digital identity has become our most valuable digital asset” thereby providing tools for the banks to ensure that the asset looks like serious business.

Fintech outlook good

In the long run, what does this mean? There is no need for gloom. If you have a great idea in the fintech space, go for it. A recent report by the Boston Consulting Group (Global Fintech 2023) estimates that fintech revenues will grow six-fold from $245 billion to $1.5 trillion by 2030, suggesting that the sector as a whole, which now has a 2% share of $12.5 trillion in global financial services revenues, will make up 7% of the total and that fintechs will make up almost 25% of all banking valuations worldwide by 2030. It will not be an extinction. There will be more rettch red dragons and more fintech red wolves.

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