Economic Downturn and Market Sell-Off Take a Toll on Fintech Fundraising, Valuation

Economic Downturn and Market Sell-Off Take a Toll on Fintech Fundraising, Valuation

by July 15, 2022

2021 was a record-breaking year for fintech funding and unicorn minting. Globally, fintech companies attracted an all-time high US$132 billion last year, more than double 2020’s figure. Soaring funding activity pushed valuations to new heights, allowing 157 fintech companies to reach unicorn status.

But this year’s inflation surge, rising interest rates and economic downturn have triggered a stock market meltdown. The New York Nasdaq, which contains many of the world’s most valuable listed technology companies, has fallen 32% from its all-time high set in November 2021, and Ark’s Innovation exchange traded fund (ETF) (ARKK), which invests in disruptive innovation companies, has dropped more than 50% since the start of 2022.

This landscape has prompted a fundraising downtrend for private companies and a drop in startup valuations as investors become more sensitive to risk assets and less patient with unprofitable firms, a new report by Morningstar company Pitchbook says.

Startup Competition venture

With investors’ patience wearing thin, public fintech companies will likely be pressured to focus on profitability by seeking new revenue streams, cutting costs, exiting money-losing businesses, and even seeking an acquirer. Late-stage startups, meanwhile, could be enticed to remain private for a longer period of time as they focus on investing in growth over profitability, the report says.

Insurtech stocks plunge 80%; neobanks, brokers and crypto drop 59%

The document, titled Fintech Q2 Public Company Valuation Guide, looks at stock performance, revenue forecasts and market capitalizations of key publicly traded fintech companies to understand the potential impact of public companies on the private markets.

According to the analysis, publicly listed fintech companies in the insurtech, neobanking, online brokerage and cryptocurrency spaces, have taken a massive hit this year.

PitchBook’s insurtech cohort, which comprises six insurtech companies, plunged by a staggering 80% over the past year. All of these companies are expected to generate negative earnings per share (EPS) in through 2024.

Similarly, in PitchBook’s neobanking, brokerage and crypto cohort, which comprises five companies, stocks have fallen 59% over the last 90 days. Four out of five of these companies are expected to generate negative EPS through 2024.

Plummeting stock prices and poor profit expectations could cause investors to pressure insurtech companies, neobanks, brokers and crypto outlets, to restructure, notably by reducing headcount and outsourcing jobs to inexpensive locations, or to seek an acquirer, PitchBook predicts.

This will likely impact the valuation of late-stage startups in these categories such as homeowners insurance provider Kin Insurance, health insurance startup Bind, crypto derivatives exchange FTX, and online broker eToro, the report notes.

Although high-growth payments and infrastructure companies have declined by 40% in the last 30 days – similar to insurtech companies and neobanks, online brokers and crypto companies –, four of the six companies comprising this category are already generating positive EPS, presenting an encouraging outlook on stock prices for the near future.

“We believe public investors in payments and fintech companies are likely to be more patient as many legacy payments firms generate attractive margins and benefit from operating leverage,” the report says. “Contrast this with neobanks and insurtech, which are unproven in their ability to generate consistent profits.”

Funding dries up

The global market sell-off and economic downturn have changed the funding environment for startups dramatically.

In Q2 2022, global fintech funding saw US$20.4 billion raised, the lowest amount of quarterly funding and deals since Q4 2020, according to CB Insights.

As belts tighten, many fintech companies struggling to raise funding were forced to accept lower valuations to stay afloat. In June, London-based payments services provider SumUp raised funding at a valuation of EUR 8 billion, slashing its valuation by 60% from earlier this year.

Similarly, Swedish buy now, pay later (BNPL) giant Klarna, closed a US$800 million round just this week at a US$6.7 billion valuation, down 85% from US$45.6 billion a year ago. In May, Klarna CEO Sebastian Siemiatkowski announced it will lay off 10% of its global workforce, citing market constraints. As many as 700 people will be affected.

Featured image credit: Freepik