As a wave of fintech companies have driven successive rounds of funding over the past five years with ever-higher valuations, Swedish buy-now-pay-later Klarna has expressed its ambition to be on par with Ryanair, Tesla and Amazon in this sector .
But now that central banks are raising interest rates to curb rising inflation, Clana is trying to raise new funding for less than half its peak value of $ 46 billion, and fintech companies have to adapt to a world where low-cost scales are no longer is not feasible. , and business models must prove effective Business by making a profit.
In 2021, record numbers of investments in fintech companies flooded in, but many of them are now struggling to raise new money as they discuss selling themselves or accepting lower valuations so they can stay afloat, according to investors, analysts and industry executives.
The payment service provider SumUP on Thursday raised funds at a valuation of € 8 billion – much lower than the valuation of € 20 billion discussed earlier this year.
With spending cuts, fintech’s chances of survival can be measured by how much cash is on their balance sheet. “You will panic if you have less than a year’s cash on hand,” says Eric Bodzuwet, founder and co-CEO of German investment application Skellabel Capital.
Venture capital firms more than doubled their investments in the sector last year to $ 134 billion, which helped fintech valuations outperform any other technology sub-sector, according to data from Crunchpeace. In the second quarter of 2021, funding reached its peak when investors such as Excel, Sequoia Capital, SoftBank and Berkshire Hathaway supported groups including Neobank, a Brazilian digital lender, the German brokerage firm TradeRepublic, Inc. Molly Payments in Amsterdam. Financial services companies last year represented about $ 1 out of every $ 5 of the total capital investment.
But current valuations of public fintech companies collapsed faster than they rose, due to funding that slowed sharply in the first quarter. Ratings of fintech companies have fallen sharply than any other technology sector, according to a recent report by Andreessen Horowitz Partners, which cited data from Capital IQ. While valuations fell from 25 times forward income in October 2021 to four times last May.
According to CB Insights, the amount raised for fintech companies in the fourth quarter fell 21 percent to $ 28.8 billion from a record high of $ 36.6 billion in the second quarter of last year.
“It was easy for the funds that raised a lot of money to say, ‘We’re just going to double the valuation …’ Acorns and Compass added, ‘The effect will be common by the fall.’
Arjun Kapoor, managing partner at Forcast Labs, said many fintech companies have raised money with high valuations based on ambitious growth targets. In this regard, he said: “With all the changes in the market, most of them will not achieve the goals they have been waiting for, which means the company is not worth the money they have raised.”
However, the sector is expected to bounce back in the long run, “many companies will be under pressure during this process”.
Investors are particularly skeptical about competing consumer-oriented digital banks, as high inflation reduces people’s ability to save and increases the likelihood that they will default. Fintech bank financing fell 48 percent to $ 4.4 billion in the first quarter compared to the same period last year, according to CB Insights.
A divergence of finances was a possibility, says Robert Lee, fintech analyst at Beachbook, as consumer fintechs struggle while those selling software to others will be more stable. Among them is UK-based cloud banking fintech Thot Machine, which doubled its valuation to $ 2.7 billion in its last round of funding last May.
Meanwhile, executives such as Yorik Naif, CEO of the Dutch brokerage firm Box Box, are considering postponing their planned fundraising rounds. “These companies, including ours, need to focus more on the path to profitability,” he told the Financial Times. “If you are structured in a way that only focuses on growth (…) you will have problems.”
David Sozna, CEO of PersoniTex, which provides marketing advice to the banking industry, said many U.S. consumer fintech companies have begun cutting their marketing budgets in an effort to save cash. “We’re definitely seeing some customers say, ‘OK, maybe we should stop or slow down,'” he added.
Corporate bankers recommend keeping as much cash as possible to get safely through what can be a difficult two years of raising money.
“If you consider how long it will take you to do a fundraising round, you probably need 30 to 36 months so you do not have to go back to the market,” said a senior banker at a US commercial bank. said. He added that only very strong companies will be able to raise funding even at the same level as last year.
The British broker Freetrade, which was worth £ 650 million in November, raised £ 30 million through a loan he took out last month. CEO Adam Dodds said at the time that the move was aimed at strengthening the company’s balance sheet without reevaluating it. “This is a volatile period for markets,” he said at the time. “It may not be worth focusing on. Valuation at this point.”
In addition to low valuation, which can be embarrassing for markets and hurt sentiment internally, the clumsy rounds can include more difficult terms such as improved liquidation protocols and anti-dilution protection, says Tom Mason, an analyst at Standard & Poor’s Global Market. Intelligence.
While Keidan of Torch Capital has said selling the whole thing is becoming an increasingly attractive option for many companies. Apple’s changes to privacy terms have dramatically increased customer acquisition costs, making existing customer base more valuable at the same time as fintech companies’ ratings decline. He said boards began investigating potential sales in the spring.
Acquisitions of fintech companies – which are already on track to beat the 2021 record – are likely to accelerate through the rest of the year, as traditional financial companies such as JPMorgan Chase and Mastercard benefit from relatively inexpensive software groups.
“I see it maturing very fast at the moment,” said Michael Abbott, head of global banking at Accenture, adding that relationships between fintech competitors and established firms are growing.
Among the deals concluded so far this year are UPS’s acquisition of Welthfront and Fiserve’s acquisition of Phoenixact.
As Abbott said, “What consumers want is the best that new banks can offer in terms of expertise and access to the product quickly, but at the same time, what they need in a pricing environment is the bank’s balance sheet.”
One investor in a large private equity firm said that in recent weeks they have received many offers from fintech companies that want to sell themselves, but they have not agreed to any of them.
“Who has the right to say that this price is really the right price? What if it becomes really excessive six months from now?”