The fintech funding downturn is a correction, not a retreat

All global markets took a hit in 2022, and the fintech industry was no exception. Coming down from the highs of 2021, VC funding into fintech slowed for four consecutive quarters. Amid falling valuations and layoffs, fintechs also faced inflation and an uncertain economic climate. 

Nevertheless, CB Insights lead fintech analyst Anisha Kothapa insists that VCs are not retreating from the industry. Instead, they are simply signing smaller checks. VCs are on a quest for profit rather than high-burn-rate growth.

Here are the key takeaways from the State of Fintech 2022 report in four charts:

1. Downturn in fintech funding is not a retreat but a correction 

• Global fintech funding reached $75.2 billion in 2022, marking a fall of 46% year on year.
• However, the total funding for 2022 was up 52% compared to the $49.3 billion raised in 2020.  
• The number of deals made fell slightly from 5474 to 5048 - marking an 8% drop.
• However, the number of deals made in 2022 increased by 37% compared to 2020, which cements the idea that funding is not fleeing the fintech industry.

With VCs focused on making smaller calculated bets, fintechs raised less money in 2022 than in 2021. The late-stage median deal size halved year on year, falling to $45.5 million from a peak of $91.3 million in 2021.

2. US continues to lead in fintech funding and deals

• The US continued to lead in funding and deals compared to other regions. It raised $3.9 billion in Q4 2022, accounting for 36% of all global fintech funding.  
• Europe came in second place with $2.8 billion, and Asia came in third place with $2.7 billion raised. 
• Funding to Latin America and Caribbean-based fintechs dropped 71% from $13.9 billion in 2021 to $4 billion in 2022. However, the number of deals made only fell by 5%.

Mega rounds ($100 million and up) fell across all regions. Asia and Europe surpassed the US in total Mega round funding, raising $1.4 billion each. And the US managed to raise $1.1 billion.

3. Payments sector dominates

• Payments managed to raise $3.4 billion over 188 deals in Q4 2022. Though the funding rate was down from $3.9 billion in the previous quarter, the number of deals made was up by 5%  
• The banking sector rebounded slightly, raising $1.8 billion in Q4, compared to $1.2 billion in Q3. However, the deal count decreased from 76 in Q3 to 62 in Q4. 
• Insurtech funding remained relatively flat throughout 2022. It saw the smallest quarter-on-quarter decline of any fintech sector, ticking down 4% from $2.4 billion to $2.3 billion. The deal count also fell slightly from 143 in Q2 to 140 in Q3. 

Overall, all sectors saw a drop in funding to 2020 levels or below. Banking funding saw the largest drop, down to 2018 levels. However, funding remains larger than pre-pandemic levels.

4. Polychain Capital leads US investments rounds 

• Polychain Capital was the most active fintech investor in Q4, backing 8 fintechs and surpassing Coinbase Ventures, which topped the list during the previous quarter. 
• Other notable investors included Andreessen Horowitz with 7 deals, Circle Ventures and Coinbase Ventures each backing 6 startups.
• Uniswap, an Ethereum based protocol and decentralized exchange raised the highest amount ($165 million) at an valuation of $1.7 billion. 

According to Kothopa, 2022 was a very eventful year for Venture Capital - filled with bankruptcies, valuation cuts, and layoffs. That said, 2021 was an outlier year and not a good benchmark for evaluating fintech capital funding.