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Finch Capital’s latest report reveals a 70pc drop in funding for fintech start-ups across markets in Europe as investors exercise caution within the sector.
A new report has found that investment in European fintech firms has plummeted in the first half of this year as mega rounds and exits become rarer.
Amsterdam-based Finch Capital published its latest State of European Fintech report today (12 September) in which it found that fintech start-ups have been heavily impacted by an unfavourable funding environment that saw them raise only €4.6bn in the first half of the year.
This is compared to last year’s relatively strong performance, when the sector raised €15.3bn in the first half of the year.
According to the report, the 20 funding rounds in the previous two years accounted for half of the market, whereas this year they account for more than 60pc. However, the size of individual rounds has decreased.
“Since mid-2022, we have seen an increase in investment discipline in public and private markets, resulting in less funding, lay-offs, less IPOs, flight to quality and focus on capital efficiency,” said Radboud Vlaar, managing partner at Finch Capital.
“This will continue to be painful for the next 12 months but will result in a more healthy and sustainable start-up, hiring and investor ecosystem.”
The 70pc drop in funding for fintech firms was seen across major markets such as the UK, Germany and France. However, the UK’s share of total funding accounted for half of the total capital raised in Europe – up from 45pc last year.
Investors from the US have also taken a step back from fintech funding in Europe, according to the report. Two years ago, there were three US-based firms among the top five investors in the UK. This year, there were none.
Much of the losses were borne by otherwise resilient sectors such as payments, which broke records last year, because of growing caution from investors around valuation inflation. Meanwhile, early-stage crypto firms in the fintech sector performed well.
“With investors bridging overvalued portfolio start-ups to bring them to profitability and struggling to find attractive exits in a grossly devalued market, we are likely to see a period of consolidation in the fintech space,” explained Vlaar.
“[This is because] many verticals are highly fragmented, creating a smaller but more sustainable ecosystem. We should also start to see a slow recovery of the IPO market in the next semester as valuations have started to slowly pick up and inflation is declining.”
The report also found a lengthening of time to fund in many markets, particularly in Ireland, Poland and the Nordic countries, as investors refocused on core local markets with the bar for non-local investors rising to higher levels than before.
It gave the example of investors such as Enterprise Ireland, British Business Bank and BPI as funds that continued to back local fintechs, allowing capital to remain in the market. France had the largest equity deal of the year with Ledger raising more €400m.
“Last year’s shake up with valuations coming down, fundraising slowing down and the exit window closing up, was painful yet necessary,” Vlaar went on.
“Consolidation and more competitive investment flows, combined with still significant levels of undeployed capital, will bring maturity to the fintech sector.
“This new normal level of activity demonstrates the refocus of the fintech ecosystem on long-term sustainability versus short-term gains.”
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