REPORT: FinTech market set for cooling and consolidation as macroeconomic factors bite

by James · October 13, 2022

Finch Capital’s ‘State of European FinTech Report 2022’ finds that fundraising by FinTechs is becoming more competitive and price-sensitive, despite record levels of unspent investment capital.

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In his last ‘State of European FinTech’ report, fintech venture capital firm Finch Capital forecasts a period of cooling and consolidation across the FinTech sector as macroeconomic conditions become more challenging. However, an abundance of unused growth capital gives cause for optimism for founders and talent to make a soft landing.

The European FinTech sector has seen significant growth in recent years with the fintech funding volume growing from around $6 billion in 2020, to around $19 billion in 2021. The total number of FinTech exits globally also peaked in 2021 at 966. In the same period, FinTech investments globally peaked USD 210 billion, with crypto and blockchain businesses performing particularly well.

Finch Capital's latest update on the European FinTech scene

In its seventh State of European FinTech report, the team at Finch Capital assessed four key trends in FinTech as proxies for the health of the sector. The team assessed: the number of new FinTechs founded; volume of funding; the number of hires across the industry and the number and value of successful exits.

Investor Ecosystem pulls back to 2018/2019 levels

Finch Capital’s research reveals that as economic conditions have become more uncertain during 2022, FinTech investment has slowed. The report shows that the establishment of new businesses in the FinTech sector peaked in 2018 and has decreased by 80% in the past year.

Since Q2 2022, Public Tech markets have returned to 2019 levels after a strong rebound since 2020, the private markets are undergoing a similar but slower transition to 2019 valuation levels, erasing the 200-300% growth in valuations during 2020 -2021.

This decline has coincided with a 70% drop in IPOs and exit windows for large venture M&As drying up, as well as venture funding with particularly “megarounds” falling by the same amount.

In 2021, the top 20 funding rounds in Europe accounted for 50% of the market. Across the investment ecosystem, there has been a 25% decline in funds raised by FinTechs, and like all previous cycles, corporate investors have pulled back in the face of macroeconomic uncertainty.

Caution in the FinTech market is also highlighted by a decline in recruitment, with growth in new hires down 50%. Europe accounts for only 10% of the total reported fintech terminations globally, despite receiving 25% of global FinTech funding.

The report's co-author: Radboud Vlaar, Managing Partner at Finch Capital

Reason for optimism: A soft landing for the strongest FinTechs

Nevertheless, the sector is still hiring, with around 10% of FinTech firms currently advertising vacancies. Demonstrating a shift towards a less well-funded and more competitive landscape, existing vacancies are becoming more focused on revenue generation (such as sales roles), and less on technical skills such as engineering.

Dry powder is at an all-time high of $28 billion in unspent capital among Fintech investors, and it is a function of when and on what terms it is deployed as opposed to if. The first signs are that these levels of dry powder are not sustainable with a 40% decline in new funds raised in 2022 vs 2021. As a result, funding will not dry up in the short term for the better companies that show healthy unit economics, opportunities and potential for growth that allows for a soft landing.

Commenting on the findings Radboud Vlaar, managing partner at Finch Capital, said: “After many years of impressive growth, perhaps overheated, there is no doubt that a worsening macroeconomic situation and tightening of the money supply is weighing on the FinTech sector. This does not mean that funding has dried up, only that investors are becoming more discerning and In fact, our research shows that dry powder is at an all-time high, with $28 billion in unused capital among Fintech investors.

“With investors becoming more cautious about where they put their money, and potentially over-invested startups struggling to exit, we are likely to see a period of consolidation in the FinTech space as many verticals are highly fragmented, creating a smaller but more sustainable ecosystem.

“There was always an element of uncertainty around the long-term sustainability of valuations for some companies, particularly in growth stages. This shake-up, while painful, is also necessary. Consolidation and more competitive investment flows, combined with still significant levels of unspent capital, will bring maturity to the FinTech sector. And despite a difficult short-term outlook in the economy overall, a new normal level of activity will resume in FinTech over the next 12 to 18 months, with a focus on long-term sustainability,”

About Finch Capital

Finch Capital is a European thematic growth investor. We currently focus on 3 themes: Finance, Real Estate and Health Technology. We support companies generating €2m+ in ARR by investing €5 to €10m initially and help them scale to €30m-€50m revenues by building sustainable and capital efficient business models. We have invested in ±45 companies including Fourthline, Goodlord, Grab, Hiber, Twisto, AccountsIQ, ZOPA and Symmetrical.

Finch Capital consists of a team of 12 investment professionals with broad entrepreneurial experience (e.g. Funding Circle, Adyen), prior investment experience (e.g. Accel, Egeria) and industry background (e.g. Facebook, McKinsey), located across offices in Amsterdam and London. For more information see www.finchcapital.com