In the wake of rising interest rates investors have grown reluctant to fork out additional cash to start-ups trying to disrupt the financial industry. For Example, Klarna’s valuation dropped by more than 70 per cent to €6.5bn in a funding round last year, while UK-based finance firm Railsr went bust.
What is the status now?
Unfortunately, investments to Fintech Companies have remained scarce in 2023. However, now funding levels & market performance have slightly stabilized, BUT 2023 will likely see the lowest level of FinTech investment since 2017 and macroeconomic volatility and uncertainty around paths to profitability has led to a further decline in funding. And despite the correction in valuations, M&A transactions in 2023/H1 have fallen 39% from their peak in 2021/H2 as acquirers and acquirees struggle to agree fair prices post the drastic changes in the market. Also, Fintechs see lower investment amounts at longer time intervals, compressing cash runway and funding fell consistently across the globe, ~66% YoY for all global regions.
Some concrete examples
The top 15 leading global investors saw contrasting changes in their investment strategy during the boom-and-bust investment landscape of '20-'23/H1. Certain investors are less prone to reacting to market volatility and will continue investing in this scarce market. 2023 has seen a rebound in public market performance. Alongside this, Fintech revenue multiples fell from the peak in 20x in Q2/21 to 4x in Q2/23, returning to a longer term stability. The valuation correction has also been felt by some of the largest private Fintechs.
In September, we read how German fintech Solaris struggles to raise funds to execute major contract.
In July we read about FIS. Just four years ago, Fidelity National Information Services, known as FIS, merged with Worldpay valuing the latter at $43bn. Recently, FIS said it would sell a majority stake in Worldpay to private equity at a valuation of $18.5bn. Annual ebitda for Worldpay at the time of both transactions was around $1.8bn. This implies that the valuation multiple of the business has crashed from 24 times to 10 times in the space of a few years.
Stripe was valued at $50bn in its latest funding round in March, around half the valuation it carried two years ago. UK-based Checkout.com, which became Europe’s most valuable private tech group when it was valued at $40bn last January, slashed its internal valuation to about $11bn late last year.
So, to summarise: investors are more cautious post the 2021 boom! 2021 fintech valuations were driven partially by investor interest in the theme of embedded finance and its infrastructure. In the current market conditions: Fintechs will have to demonstrate to investors that they have meaningfully advanced since their last round. Early-stage new entrants may find it more difficult to justify a new entry in this busy space.
Realistic note to Fintech founders: Valuation isn't a mere number; it's a reflection of your startup's potential BUT ALSO how much you have really ACHIEVED! Setting a realistic valuation is the cornerstone of attracting the right investors.
Remember also, that metrics matter: To determine a realistic valuation, founders must delve into their financials, market trends, and competition. And how to adapt to growth: Valuation isn't static; it evolves with your startup's growth.
Valuation for Fintechs is a blend of science and art, a continuous process that demands both realism and ambition. It's about finding that equilibrium point where your Fintech's worth aligns with its potential.
Sources BCG, Sifted, several Linkedin posts, Royal Park Partners, CB Insights and experience by FFE crew. Pictures from the latest BCG State of Fintech Q2/2023 Quaterly Update September 2023