Global fintech funding has taken a significant 49% tumble to $23 billion during the first half of 2023, an unprecedented slide set against the backdrop of economic decline, as reported by S&P Global on June 13. The decline commenced in the latter half of 2022, but fintech companies’ valuations have nonetheless been steadily rising in 2023, hitting $9 billion and $14 billion in Q1 and Q2, respectively.
Round values witnessed a significant decrease in 2022, dropping by 12% and 14% for seed and early-stage firms, respectively. Meanwhile, funding rounds for growth-stage and mature fintech companies nosedived by 43% and 66%, respectively.
During H1 2023, only 1,178 investments were made, a 64% drop from the same period in 2022. The second quarter of 2023 saw a decrease to 522 deals from 656 in Q1, a decline from the 944 investments made in Q2 2022.
Big Deals Mask the Deterioration
Three major deals, each around $1 billion, including Stripe’s $6.87 billion round, somewhat concealed the deterioration in the fintech funding environment during the first half of 2023. For a substantial rebound in aggregate funding, however, a surge in deal volume is necessary.
A trio of elements might suspend the further decline of venture capital investments in H2 2023: recovery in public market valuations of tech stocks, stabilization in interest rates, and an uptick in mergers and acquisitions (M&A) activity. Despite the current downturn, underlying digital trends in financial services remain robust, and the long-term growth story of fintech companies remains intact.
Despite the seemingly dreary climate, investor sentiment is consolidating around established fintech companies with dominant market positions, reflecting pockets of resilience. The fintech funding scene within the four largest markets — the US, the UK, India, and Singapore — continues to significantly impact global fintech funding values.
Mega-rounds (those over $100 million) have been absent as well. Q1 saw 23, but Q2 had just nine, a significant decrease from the 55 made in Q2 2022. Stripe emerged as a significant victor, securing $6.5 billion. Overall, US fintech companies raised $12.16 billion during H1 2023, a 28% drop as reported by S&P.
In contrast to funding trends, company valuations did not follow suit but rather improved. Valuations rose to $9 billion and $14 billion in Q1 and Q2 2023, respectively, from $9 billion in Q3 and $8 billion in Q4 2022.
According to a valuation guide released by PitchBook, share prices for recently public fintech companies have rebounded more rapidly than the broader market, with a 21.2% rise in Q2 compared to the Nasdaq’s 12.8% and S&P 500’s 8.3% return. Investors are increasingly prioritizing profitability, with traditional IPOs (up 21.2%) outperforming SPACs (up 13.5%).
Many fintech companies have focused their efforts on achieving profitability, resulting in reductions in personnel, marketing costs, and other operating expenses. Some fintech companies, such as Neobanks, are beginning to emerge with profitable business models.
AI’s Promise: A Beacon for Fintech Companies
While venture capitalists are slower in their capital deployment overall, the lure of artificial intelligence (AI) remains a potent force. In H1 2023, over 60 funding rounds, totaling $1 billion, involved startups claiming their focus on AI. As nearly 50 of these AI-touting fintech companies operate at seed-to-growth stages, experts anticipate a surge in their appeal to VCs for larger checks within the next 12 months.
Digital lending, insurtech, and investment and capital market technology segments emerged as the primary beneficiaries. Each of these verticals saw over 10 AI-based fintechs raising capital. The most substantial investment in an AI-centric fintech startup was a $100 million bet on Alphasense. The financial data solutions provider intends to quicken its deployment of generative AI to simplify the gleaning of summarized insight from financial documents for its customers.
In short, the global fintech landscape in 2023 is far from a straightforward story of decline. The dip in funding is countered by the rise in valuations, driven by strategic cost-cutting measures, the distortion effect of megadeals, and the appealing allure of AI. Despite the financial turbulence, fintech companies continue to demonstrate resilience, carving out a path of steady valuation growth amid the storm.
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