How fintech investments fared in Q3 2022, in 4 charts

Fintech continues to find itself in troubled waters, with contracting venture capital and increasing layoffs. The global recession-bound economy, record-high inflation, and the war in Ukraine have created an atmosphere where the industry is stripped of cash.

Some in the industry expected better from 2022 following a record-breaking 2021, where one in every five VC dollars was invested in fintech. Though it can be argued that the joys of last year were not necessarily correlated with strong business fundamentals, and the circumstances that followed could be a threat to fintech’s growth trajectory.

Dealroom’s recent report on fintech funding in Q3 2022 demonstrates that in numbers.

Since the previous quarter, the public market for fintech investment has fallen sharply to pre-pandemic levels, and at a steadier pace, the private equity market is also following suit. That doesn’t mean the progress of the last couple of years has been undone, but it does ring alarm bells.

In Q3 2022, fintech startups raised a total of $13.3 billion globally. For reference, that’s 64% below the industry’s all-time high of $37 billion in Q4 2021. YoY, fintech funding is down 62%, from $35 billion in Q3 2021.

Q3 2022 has also seen health overtake fintech as the most invested industry worldwide. While health itself has seen a 35% decrease in capital influx, fintech’s decrease of 62% is substantially higher. As a result, investment in health stood at $16.7 billion, against $13.4 billion in fintech.

As the global chip shortage continues, it is understandable that the only industry to see an increase in investment has been semiconductors, by 28%.

Within fintech, investment in all verticals is down from Q2 2022. The biggest hits were taken by financial management solutions (66%), regulatory technology (61%), wealth management (50%), banking (44%), payments (43%), and crypto (40%). Insurtech has shown some semblance of resilience, with no decrease in funding.

Payments, however, remain the most popular sector among investors, seeing an influx of $3.4 billion in the quarter. This is followed by crypto and DeFi, with $2.8 billion in funding, and insurtech, with $2.1 billion.

Many in the fintech industry have maintained the opinion that this fall in funding is the industry re-orienting itself. The level of funding in 2021 was, simply put, unsustainable.

Scarlett Sieber, the chief strategy and growth officer at Money20/20, echoes this opinion. According to her, there was “too much money” invested in fintech during 2021, and what’s happening now is the industry “level-setting” itself.

The drying funds have hit late-stage startups more than those just starting off. Data shows that the median ticket size of funding for Series B rounds and beyond has fallen drastically. In contrast, Series A rounds have shown greater resilience, while seed funding has actually gone up.

YoY, in Q3 2022:

• The median seed funding has shown a 33% increase, from $2.4 million in Q3 2021 to $3.2 million in Q3 2022.
• The median Series A funding has fallen over 6%, from $10.9 million in Q3 2021 to $10.2 million in Q3 2022.
• The median Series B funding has fallen a sizable 46%, from $37 million in Q3 2021 to $20 million in Q3 2022.
• The median Series C+ funding has gone down almost 62%, from $91 million in Q3 2021 to $35 million in Q3 2022.

This is a clear indicator of VCs’ newly formed focus on profitability – expecting to see fintechs hitting that target far sooner than they did previously. In the world of early-stage fintechs, VCs still have their eyes set on the next big idea.

This is most evident when looking at how mega-rounds have gone down considerably.

The global mega-round funding in Q3 2022 totaled around $5 billion, down from $13.6 billion last quarter. This figure is down 79% from its highest in Q4 2021.

Alarmingly, Tiger Global, the biggest fintech VC investor globally, has decreased its investment by 90% between Q2 and Q3 2022. After having written down its investment portfolio earlier this year, the firm recently announced it’s putting together a new $6 billion fund. This new fund is not only $2 billion short of what it was originally poised to be, but also less than half of the last fund Tiger Global closed in February, worth $12.3 billion.

The firm also announced that this fund will be deployed at a slower pace, with only half of it being invested in the first year. For comparison’s sake, most of their last fund has already been invested.

Other prominent fintech investors, including Sequoia, Lightspeed Ventures, and Global Founders, have also drastically reduced their investment in the past two quarters.

As a result, fintech has produced the lowest number of unicorns since Q3 2020, at a mere 7. Just last quarter, we witnessed the formation of 28 fintech unicorns globally.

In such an investment climate, Finch Capital has argued that the fintech industry is heading towards a phase of cooling down and consolidation. While unfavorable macroeconomic conditions could spell trouble for the industry, their report found that there’s an abundance of undeployed capital just sitting there, waiting to be invested. This could soften the blow for the industry.

“After many years of impressive growth, perhaps overheated, there is no doubt that a worsening macroeconomic situation and tightening money supply are weighing on the fintech sector. This doesn’t mean that funding has dried up, simply that investors are becoming more discerning and price-sensitive. In fact, our research indicates that dry powder is at an all-time high, with $28 billion of undeployed capital among fintech investors,” said Radboud Vlaar, managing partner at Finch Capital.

Vlaar believes that the investors’ cautious attitude will usher in a period of consolidation in the space, hence creating a more sustainable ecosystem. Furthermore, there has always been a question about the long-term sustainability of some growth-stage firms’ valuations, which had to find a painful equilibrium. The next 12-18 months will arguably help shape this equilibrium, and with a renewed long-term focus, will help mature the fintech industry.

Dealroom’s data supports the idea that the industry is heading toward consolidation. While M&As have fallen from their peak in 2021 and early 2022, they are still above their 2020 level.

More interestingly, only two fintech IPOs and SPACs have taken place this quarter. Compare that with the 28 that happened in Q3 2021, and 15 in Q3 2020, and you see that public funding is down significantly.

An interesting phenomenon that has developed is that with drying public investments, private equity investors are buying fintech firms out of public markets and into private ownership. Notable deals here include Vista Capital Partners’ acquisition of Avalara – a provider of tax compliance solutions – for $8.4 billion, and EQT Group’s acquisition of Billtrust – a B2B payment solutions and AR software provider – for $1.7 billion.

Undeniably, fintech is going through a rough patch. While a more stable and sustainable version of the industry is expected to rise over the next couple of years, firms in the space will need to endure the current shake-up to get to the other side.