Hey Fintech Friends,
Happy new year, and an even happier Signals Q4 Roundup!
For new readers, Signals is the subscriber-only edition of TWIF designed to get you away from the headlines and to explore the larger trendlines. Each quarter, we break down four key questions on fintech activity:
Which concepts are getting funded?
Where are exits, M&A, and SPACs concentrated?
Which firms are raising debt and venture funds for fintech?
Which products were launched over the last quarter?
If you haven’t already, subscribe to future editions here!
Overall activity
If you’re reading this, you’re probably already clued into the big picture– and it’s not great!
In 2022, the number of companies going public via IPO fell by 77%; via SPAC by 87% year-over-year. Tech stocks and crypto trended steadily downwards amid interest rate hikes, soaring inflation, and the ongoing war in Ukraine* painting a gloomy outlook for the world economy.
Between Q3 and Q4 ‘22, fintech funding was (surprisingly) steady, totaling $5.6 billion in Q4– a $251 million decrease from Q3.
See the full Q4 ‘22 data here (for paid subscribers only).
Good things happened ✨
Thales and HandSome released a “Voice Payment Card” to give visually impaired cardholders better control over payments at checkout.
Eco-friendly cards are sprouting up! Wise launched a biodegradable debit card; Merpay released a credit card made from recycled industrial waste; TreeCard, a climate-conscious money app sporting debit cards made from wood, raised a $23 million Series A.
Shutdowns happened 😵💫
FTX collapsed, pushing BlockFi to file for bankruptcy. Other companies with exposure to FTX are still working through the fallout.
GloriFi, a right-wing “anti-woke” banking platform, shut down shortly after launching in September. The WSJ reported on stumbles including a credit card made from the same materials as shell casings that “failed when the company realized the material could interfere with security chips and potentially be too thick for payment terminals.”
Let’s dive into fintech activity in Q4.
Which concepts are getting funded? 🤑
Funding accumulated towards Series B & Series C rounds in Q4 compared to the prior quarter, as greater risk aversion cause investors to pull back from speculative, early-stage opportunities and public comp valuations dampened appetite for later-stage investments.
See the full Q4 ‘22 data here (for paid subscribers only).
Areas that saw the highest activity were:
Investment platforms, led by CrowdStreet’s $43M Series C, The Coterie’s $40M Series A, and Baraka’s $20M Series A.
A few concepts received notable funding, including:
Embedded credit origination, with funding to Lentra, Zest AI, BizBaz, AltScore, and Uplinq fueling embedded credit assessment tools. Taking it a step further, Younited, Mercantile, Lama AI, Pylon, and OatFi’s raises underscored the demand for plug-and-play debt capital to accompany these solutions (more on this later 👀).
Private markets investing on a streak from Q3, with funding to CrowdStreet, The Coterie, Tellus, Equi, PropHero, Fintor, Poolit, and Getaway democratizing investment opportunities in real estate, venture capital, hedge funds, and private credit. They were joined by Troop, a platform that enables retail investors to easily participate in proxy voting.
Eco-friendly investing & banking, with funding to Net Purpose, Pathzero, Raise Green, impak Finance, Walden Mutual, and Fennel aligning our financial behavior with climate incentives.
Open banking payments, with funding to Finexio, Fintechture, Banked, Currensea, Atoa Payments, Broodil, and Enable Banking expanding access to account-to-account payment– just as UK retailers are calling for lower caps on card interchange fees and Rishi Sunak learns how to use contactless payments.
Source: The Independent - Rishi Sunak, man in charge of country’s money, doesn’t know how to use contactless
Where are exits, M&A, and SPACs concentrated? 📈
Business financial management led acquisition activity, driven by Vista Equity Partners, Thoma Bravo, and Cinven’s respective purchases of Avalara, Coupa, and TaxAct. Vista and Thoma Bravo are both launching new flagship funds, signaling that this could be the start of a larger buying spree by private equity.
In B2C payments, Worldline pushed into Italy with the acquisition of Banco Desio’s merchant acquiring business before itself getting scooped up by Apollo. Virgo, a French digital monetization platform, went public via SPAC.
Banks saw HSBC exit Canada with a sale to the Royal Bank of Canada.
Which firms are raising debt and venture funds for fintech? 💰
Funding flooded into supporting underrepresented founders and driving social impact:
Quona closed its $332M Fund III focused on financial inclusion in Latin America, India, Southeast Asia, Africa and the Middle East.
Collide Capital announced its inaugural $66M fund to support intersectional founders solving “the next generation of global challenges.”
Fiat Ventures booked $25M for its inaugural fund focused on unconventional founders “building for the 90% of Americans.”
Financial Finesse launched its venture arm to fund solutions improving the financial lives of consumers.
Crypto funds continue to abound:
Nydig raised $720M for its Institutional Bitcoin Fund.
Bitpanda’s founders launched a (somewhat under-the-radar) venture fund to support the crypto ecosystem.
BBVA Mexicodigital economy fund targeting crypto and Web3 companies.
Which products were launched over the last quarter? 🚀
In B2C payments, QR codes are going global: Ant’s Alipay+ and UnionPay now enable international merchants to accept QR code payments from major Chinese (+other Asian) wallets. Matera, which supports QR code Pix payments in Brazil, is launching in the US ahead of FedNow’s debut this year.
It’s getting a lot easier for merchants to process crypto payments through Stripe’s crypto onramp, Fireblocks’ crypto payments engine, Blockchain.com’s crypto debit card, Gate.io’s Gate Pay, and Baanx’s Crypto Life Card in Europe.
Q4’22 Look-back: Spend money to spend money to make money
Fintech funding and product activity were largely steady in Q4, with a key undercurrent setting in: The cost of capital is rising.
Money costs more to raise as interest rates hike up, and fintechs with capital-intensive models (read: credit products) will be most acutely impacted. Last quarter gave us a taste for how fintechs will be adjusting in 2023 and showcased the opportunities for different players, like private equity funds & embedded capital platforms, to step in.
Equity and debt capital want higher returns
Tech sector valuations tend to be particularly hard-hit by rising interest rates, as the same present value equation that lets tech companies benefit from lofty future revenue potential is also more sensitive to discounting when the risk-free rate goes up. This meaningfully lowers tech stocks’ expected returns, so funding becomes scarcer and funding growth with equity capital gets more expensive for companies.
In public markets, fintechs’ forward revenue multiples– using the FINX ETF as a yardstick– were knocked down 44%, from 5.3x to 2.9x over the course of 2022. Choppy public market waters are taking the wind of the IPO sails for companies like Stripe, Klarna, Plaid, Chime, and Revolut for the moment.
Lower public comps will also weigh on valuations in private rounds, forcing many companies to reduce cash burn to extend runway. In Q4, we already saw an uptick in layoffs at a number of notable fintechs. (Psst: For anyone on the job hunt, check out postings on This Week in Fintech’s Job Board and Slack community #hiring channel.)
Higher interest on debt capital is further upping the stakes for fintechs extending credit. A major portion of fintech lending, BNPL, cash advance, and invoice financing programs, among others, are capitalized by third-party credit facilities from financial institutions, who charge interest based on three factors that are now fetching a higher premium:
A baseline rate that follows central banks’ benchmark interest increases.
The risk of the fintech’s target credit portfolio. Credit portfolios get riskier when economic conditions weaken– take non-repayment in large banks’ credit card portfolios as an indicator.
How well the fintech can underwrite credit (or to some degree lacks a track record of doing so).
Source: Delinquencies, charge-offs at major credit card issuers highest since mid-2021
Underwriting credit is a really, really hard thing to get right. In December, Goldman Sachs announced it would stop offering consumer loans through its retail business, Marcus, as part of a larger withdrawal partially driven by higher-than-anticipated credit losses.
Goldman will weather this storm because, well, it’s Goldman. Smaller fintechs, on the other hand, won’t have the same level of breathing room if credit losses start going up further than expected. These companies will either have to cover the difference with equity capital, which is costlier than debt capital, or renegotiate with creditors, which can undermine their ability to raise debt capital again in the future.
Luckily, fintechs don’t necessarily have to build credit underwriting from the ground up. Instead they can turn to the growing number of plug-and-play underwriting solutions who’ve already trained models on large data sets. Many of these vendors also partner with capital providers who’ve vetted their models, making it easy for fintechs to source debt funding in tandem.
Where to look for funding in 2023
How much venture capital is deploying this year is anyone’s guess. VC is sitting on a record $290 billion of dry powder, according to Decibel Partners, whose founder predicts only a modest slowdown in VC deployment in 2023. Founder Collective’s Micah Rosenbloom is more bearish, arguing that venture capitalists will instead focus on key holdings and that LPs may look to rebalance away from venture capital.
Despite the broader fundraising headwinds, private equity funds are also sitting on record levels of dry powder– in the US, totaling $1.1 trillion:
From PWC Private equity: US Deals 2023 outlook
The Worldline, Avalara, Coupa, and TaxAct acquisitions in Q4 were hints that private equity is getting lured in by declining valuations for B2B SaaS companies. PE is also an active acquirer of distressed debt, providing some offramps for companies with souring credit portfolios.
Going public: SPACs are out, direct listings are in
While the outlook for IPOs is gloomy, SPACs are making an outright nosedive. SPACs’ Hot Girl Moment was sparked in 2021 by sponsors touting speedier public listings that enabled companies to capture a higher share of the proceeds than a traditional IPO.
SPACs failed to rally in 2022: Over 55 SPAC deals were called off in the period as redemption rates– how many investors are returning shares for their money back– rose and the De-SPAC Index lost 74% of its value (by comparison, the S&P 500 shed 19%). Unsurprisingly regulators are also moving to tighten regulation on SPACs, which they see as lacking sufficient transparency.
Stock exchanges, meanwhile, want more companies to go public via direct listing. Direct listings allow shareholders to sell directly to the public without the company issuing new stock (protecting existing shares from dilution). The SEC is allowing NASDAQ and the NYSE to relax rules for such transactions, which could soon allow the ranks to grow from the only 11 major companies to go public via direct listing thus far.
A new factor is also emerging for companies going public: ESG. EY reports that ESG is increasingly impacting IPO valuations, as regulators shore up ESG reporting requirements globally. There’s opportunity here for fintech players to help companies track ESG performance and structure financial products that align with these metrics e.g. sustainable merchant rewards programs, eco-friendly card materials…
In summary
The economic tide is turning going into 2023. Each player will need to adjust their sails differently, but the good news is that the tools fintechs have at their disposal are evolving in conjunction.
This year, expect to see venture capital deploy more selectively and private equity take a larger stake in B2B SaaS fintechs & distressed debt. Credit products will become an existential risk for many fintechs, but a growing landscape of embedded origination tools is helping fintechs offset this. Going public will also look different as SPACs continue to die off, public listings get more lucrative, and investors+regulators increasingly expect ESG reporting.
* If you’re interested in supporting nonprofits providing aid in countries with the highest humanitarian need, check out: CARE, Doctors Without Borders, Save the Children [Charity Navigator: 1, 2, 3].
