Imani Moyes in New York and Siddharth Venktar Amakrishnan and Joshua Oliver in London
Over the past five years, a handful of fintech companies have gone through successive rounds of funding, their valuation has peaked, and Swedish buy-now-pay-later Klarna has announced its ambitions to become like Ryanair, Tesla and Amazon. in the sector.
Now with central banks raising interest rates in an effort to beat rising inflation, Klarna is trying to get new financing at a valuation of less than half, after the company reached its highest valuation of $ 46 billion. In addition, fintech companies must make peace with a world in which expansion no longer stems from concessional lending and business models must be accompanied by profits.
It is noteworthy that financial technology companies obtained record amounts of financing in 2021, but many companies are now struggling to obtain new financing and negotiate to sell their activity or to accept a lower valuation in order to meet and meet their obligations. . opinions of investors, analysts and managers working in the field.
The payment services company SumUp secured € 8 billion in financing on Thursday, a valuation much lower than the company’s previous valuation of € 20 billion earlier this year.
With the belts tightening, the way to measure fintech’s chances of survival may depend on the cash on their balance sheets. “If you expect your company to run out of cash in less than a year, you’re in a panic,” said Eric Botzwet, founder and co-CEO of German investment program Scalable Capital.
Investments by VCs in the sector doubled last year to $ 134 billion, leading to fintech companies’ valuations outperforming the rest of the technology sub-sectors, according to Crunchbase data. Funding reached its highest level in the second quarter of 2021 due to investor support such as Accel, Sequoia Capital, SoftBank and Berkshire Hathaway groups such as the Brazilian digital lender Nubank, the German brokerage firm Trade Republic and the Amsterdam payment firm Mollie. Last year, the ratio of VC investments in financial services companies reached almost $ 1 for every $ 5.
Now valuations of public fintech companies have collapsed faster than they rose due to the sharp slowdown in funding in the first quarter. Ratings of fintech companies have fallen sharply compared to other technology sectors, according to a recent report by Andreessen Horowitz partners citing data from Capital IQ. Valuations have fallen from 25 times forward income in October 2021 to four times in May.
According to data from CB Insights, funding received by fintech companies in the last quarter of the year fell by 21% to $ 28.8 billion, from its highest level ($ 36.6 billion) in the second quarter of last year .
“It was easy for funds that received large sums of funding to say: ‘We are going to double the valuation. The valuation does not have to correlate with the company’s performance. ” Jonathan Keedan, managing partner at Torch Capital, which has invested in fintech companies such as Acorns and Compass, said the effect would be visible to everyone by the fall.
Arjun Kapoor, managing partner at Forecast Labs, said: “Many fintech companies have raised capital with high valuations based on ambitious growth targets. With all the changes in the market, most companies will not be able to achieve the goals they have set. not, which means that the business is not equal to the funding he received.
Although he expects the sector to recover in the long run, “many businesses will be out of the market until that happens.”
Investors are becoming suspicious of virtual banks dealing directly with consumers as rising inflation reduces people’s ability to save and increases the chance of default. Funding for bank fintechs fell 48% to $ 4.4 billion in the first quarter from the same period last year, according to CB Insights data.
Robert Lee, a fintech analyst at PitchBook, said the impact of funding is likely because fintechs looking at the consumer are struggling, while those selling software to other businesses will be more stable. Among these UK-based fintechs working in cloud banking is Thought Machine, which doubled its valuation to $ 2.7 billion in the latest funding round in May.
Meanwhile, executives such as Yorick Naif, CEO of Dutch broker Bux, are considering postponing the planned funding rounds. “These companies, including ours, need to focus more on the path to profitability,” he told the Financial Times. You’ll get in trouble. ”
Many fintech companies serving American consumers are cutting marketing budgets in an effort to save cash, said David Sosna, CEO of Personetics, which provides marketing insights into banking. “Undoubtedly we are starting to hear some (customers) say: ‘Okay, we may have to stop or slow down.’
Bankers advise companies to keep as much cash as possible to go safely through two years in which it is expected to be difficult to obtain financing.
“When you consider the time it takes to get a round of funding, it will probably take 30-36 months before the cash runs out so that it does not come back to investors and ask for other rounds of funding,” said a senior banker. at a commercial bank in the USA. “Only very strong companies will be able to get financing at the same levels as last year,” he added.
The British broker, Freetrade, which had a valuation of £ 650m in November, secured funding with a £ 30m loan last month. CEO Adam Dodds said at the time that the move was to support the company’s balance sheet without reconsidering it: “Markets are volatile, and focusing on valuation at this stage may not be feasible.”
In addition to low valuations, which can be a confusing indicator for markets and negatively affect sentiment internally, lower funding rounds could lead to stricter requirements, such as improved liquidation protocols and shareholder protection against dilution, says Tom Mason, information analyst at S&P. Global Market Intelligence.
Kidan told Torch Capital that the option to sell the entire business is becoming increasingly attractive to many companies. Changes to Apple’s privacy terms have significantly increased customer acquisition costs and made existing customer bases more valuable at a time when fintech ratings are declining. And boards began exploring potential sales in the spring.
Acquisitions in the fintech sector – on track to achieve higher numbers than in 2021 – are expected to accelerate in the rest of the year as traditional financial firms such as JPMorgan Chase and Mastercard benefit from relatively inexpensive software packages.
“I see it taking shape very quickly now,” said Michael Abbott, director of international banking at Accenture. He added that the links between virtual banks and existing banks are constantly increasing.
Transactions concluded so far this year include UBS’s acquisition of Wealthfront and Fiserv’s acquisition of Finxact.
“What consumers want is the best virtual banks can offer in terms of experience and ability to deliver products quickly, but at the same time what they will need in a higher interest rate environment is a bank’s budget,” Abbott said. .
An investor in a private equity firm said the corporation had received regular offers in recent weeks from fintech companies that wanted to sell its business, but they rejected all those offers.
“Who will decide whether this price is right or not? What if it becomes too expensive six months from now?”
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