European fintech funding down 70% in H1 2023

European fintech funding down 70% in H1 2023

European Fintech Funding Faces Challenges Amid Challenging Economic Environment

The year 2023 has seen a significant impact on fintech funding in Europe, as highlighted in the latest report by Finch Capital. The challenging economic environment has resulted in a 70% decline in funding, with startups in the sector raising a total of €4.6bn in the first half of the year, compared to €15.3bn in the same period of 2022.

The decrease in funding can be attributed to various factors, such as an increase in investment discipline in both public and private markets. This has led to fewer funding opportunities, lay-offs, and a flight to quality and capital efficiency. Radboud Vlaar, Managing Partner at Finch Capital, noted that this shift in investment discipline has affected the number of deals and transaction sizes in the sector.

Compared to 2022, there has been a 48% decline in the number of deals, totaling 434, and an 84% decrease in M&A transaction sizes. However, overall M&A activity only fell by 5%, with volumes matching those of the previous year.

While the top 20 funding rounds have returned to pre-2020 levels, the majority of startups have experienced a significant drop in investment. Startups in the Series A to C stages have been hit the hardest, while seed rounds continue to attract funding.

From a valuation perspective, public markets have retraced to 2019 levels after experiencing record growth in 2020-2021. However, there are signs of stabilization, and private markets are also transitioning to 2019 valuation levels, albeit at a slower pace.

Vlaar predicts a slow recovery of the IPO market in the coming months as valuations start to pick up and inflation declines. This positive outlook suggests that the fintech sector may see a resurgence in the near future.

Crypto on the Rise

One notable trend in the fintech sector is the rise of crypto and lending, which have attracted the majority of investments. This surge in interest has displaced payments and banking, traditionally resilient categories that saw high levels of investment in 2022. Interestingly, one in three fintech startups is now focused on crypto/blockchain technology.

From B2C to B2B

The report also highlights the continued trend of fintech companies shifting their focus from B2C (business-to-consumer) to B2B (business-to-business). This transition can be attributed to several factors, including the growing interest in regulatory technology (regtech) and the consolidation of payments and open banking. Additionally, generative AI has the potential to revolutionize retail banking and the insurance sector, further cementing the shift towards B2B fintech.

The UK Leads in Funding

As a well-established fintech hub, the UK has shown more resilience in the face of the challenging economic environment. The country accounted for over 50% of the funding in Europe. However, even the UK, along with Germany and France, experienced a 70% decline in funding value. On a positive note, exits continued consistently, indicating that the fintech ecosystems in these countries remain robust. Poland recorded the largest drop in funding at 89.9%.

Overall, countries with an active Series A-B investor base have seen valuations hold up relatively well, with small increases in post-money valuations.

Embracing the “New Normal”

Radboud Vlaar emphasizes that the challenging environment and increased investment discipline will bring maturity to the fintech sector. The current level of funding activity reflects a refocus on long-term sustainability, moving away from the pursuit of short-term gains. While the next 12 months will continue to pose challenges, Vlaar believes that this will result in a more healthy and sustainable startup, hiring, and investor ecosystem.

The findings of the Finch Capital report provide valuable insights into the current state of fintech funding in Europe. Although the sector has faced significant challenges, there is room for optimism as funding levels stabilize and the fintech ecosystem adapts to the “new normal.”