Venture capital investments in financial services and fintech in 2023, which, just a few years ago, was the leading sector for financing startups worldwidetotaled $43 billion, its lowest level in six years, according to Crunch Database data.
That’s down more than 50% year-over-year from the $89.5 billion invested in financial services in 2022, and even more dramatically from the $143 billion invested in the sector at the market’s peak in 2021.
While still a top sector for startup investment, financial services have been displaced from the top spot. AI and manufacturing both overtook fintech in terms of venture capital investment in 2023 – a first in the last six years. In 2023, funding for healthcare startups, including biotech companies, also outpaced financial services, consistent with previous years.
Decline in funding for early-stage and late-stage fintechs
In 2023, early-stage funding for financial services and fintech startups totaled just $25 billion, the lowest level since 2017. Early-stage investments in fintech and financial services in 2023 totaled $12.4 billion, the lowest level since 2016.
Although all stages of funding in the sector declined, seed funding remained at pre-pandemic levels, down from the last two years but still higher than the amounts invested in 2020 and previous years.
“Offers at attractive prices”
What does all this mean for fintech, one of the most important technology sectors and one that has seen an investment boom in 2021 and 2022?
“You can find a lot more deals at attractive prices in a market like this in 2023 than you could in 2021,” he said. Marc Fiorentinoa partner at Index Ventures who was previously at the digital payments giant Band“There is a valuation reset, which in the long run will be beneficial for both the investor and the company, because there are no disincentives along the way.”
Quarterly funding in this sector was less than $10 billion per quarter, with the exception of the first quarter when Band raised $6.5 billion to cover employee stock option costsThis is the largest funding round in this sector in 2023, but it comes at a price: Stripe has nearly halved its $95 billion valuation from its 2021 funding.
“The worst of the fintech winter is behind us, and 2024 will look more like a pre-pandemic 2019,” Nigel Morrismanaging partner of an investment firm Q.E.D.said via email. “Fintech transaction volumes will finally level off before rising again – the first increase since Q1 2022 – and funding numbers will look similar to those of five years ago. The difference this time is that while 2021 saw a huge leap in digital adoption, 2024 will see the continued evolution of that shift.”
Investment orientation
Fiorentino is focusing on three areas of financial services investment that he believes could be significant in 2024: the next generation of fintech infrastructure, financial technology for underserved sectors and the CFO software stack.
In fintech infrastructure, this became more evident after the collapse of Silicon Valley Bank that there was a need for a more liquid market for assets and deposits for the banking sector, according to Fiorentino.
The debt sector could benefit from new trading infrastructure products, as could Robin Hood “The debt market itself is still extremely archaic, but extremely large,” he said.
The “forgotten sectors” that have so far not been well served by fintech innovation but should be, according to Fiorentino, include supply chain logistics, insurance and manufacturing, to name a few. In many of these sectors, companies still use archaic invoicing systems and outdated and inconvenient legacy systems such as wire transfers, paper checks, email and fax.
Another area that could get more attention this year, Fiorentino said, is software, the intersection where the CFO meets the CTO, either to increase revenue opportunities or manage a company’s expenses.
Fiorentino sees this as an opportunity for third-party tools to manage the shift from a flat SaaS model to pay-as-you-go. “Can I get more profit if people actually start using my tool in a more dramatic way?”
When it comes to spend management, he said, “Can I control the end-to-end workflow of what people in my company are buying, how much we’re spending on it, and maximize price optimization?” The CTO needs visibility into what tools the team is using, and the CFO wants to save money.
“In a lot of these interesting businesses, it’s not the payment itself that makes the difference, but the software workflow built around the payments.”
Releases 2023 and beyond
Better.com was the only fintech to go public at more than $1 billion in 2023. The company, which digitizes mortgages, went public via a SPAC merger in August at a valuation of $1.47 billion. As of January 9, 2024, it was valued at $542 million.
Three fintech acquisitions exceeding $1 billion in 2023 have been announced Adopt pet insuranceacquired by JAB Holdinglow cost wireless carrier Mint Mobilewhich was acquired by T-Mobileand a Brazil-based infrastructure payment company Pismoacquired by Visa.
“The best late-stage companies that have focused on profitable growth over the past 12 months will start to seriously consider an IPO,” predicts QED’s Morris. “I wouldn’t be surprised to see dozens of companies go public this year, including a number of fintechs, before the floodgates really open by mid-2025.”
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Illustration: Dom Guzman
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