H1 2023 FinTech Investment Landscape
Introduction
The global FinTech investment landscape has witnessed a few challenges in the past year. However, despite a backdrop of economic slowdown and uncertainties, the FinTech sector continues to attract significant capital, showing its resilience.
In the first six months of 2023, a total of $27.3bn was invested across 1,711 deals globally, underscoring the continued demand for FinTech innovation. Nevertheless, these figures represent a 14% decline in global investment from H2 2022 to H1 2023. This reflects cautious investor sentiment as seen across equity markets over the last 12 months.
In the United Kingdom, the FinTech sector has also faced key challenges including high inflation and cash flow constraints. As highlighted in the 2022 full year Investment Landscape Report, the economic slowdown has resulted in a few business failures, highlighting the importance of more effective operations in a highly competitive market. “With inflation remaining stubbornly high despite the highest interest rates in a generation, it is clear that there will not be a V shaped recovery”, says Kevin Chong, Co-Founder at Outward VC, echoing his own sentiments from Innovate Finance July 2022 report.
Despite these challenges, established FinTech companies have demonstrated their ability to thrive, leveraging their innovative solutions and adaptability to capitalise on market opportunities. The data serves as an indicator of the broader Fintech sector's scale, with companies striving to differentiate themselves and capture market share.
Overall, the global FinTech investment landscape continues to evolve amidst the economic slowdown, with opportunities for both established and emerging players. While the fundraising market is expected has been more selective, companies with streamlined operations and innovative solutions will be well positioned to navigate the challenges and deliver sustainable growth.
We are pleased to see that the UK remains a top destination for FinTech investment globally, second only to the United States. Our latest report shows that the UK is still receiving more investment in FinTech than all of the rest of Europe combined, which is a testament to our amazing community of innovators and entrepreneurs.
“The drop in global and UK FinTech investment is an expected result of the current economic landscape, reflecting the cautious investor sentiment as seen across equity markets over the last 12 months.
“As the voice of UK FinTech, we at Innovate Finance are committed to continuing to support the inspiring founders and firms driving positive change across financial services, and look forward to working with industry, government, and regulators to further cement the UK as the best place in the world to start, scale and grow a FinTech business."
– Janine Hirt, CEO, Innovate Finance
Global Overview
The data from the first half of 2023 highlights a wider slowdown both across capital markets and the broader global economy.
In the first six months of 2023, there were 1,714 deals with a total capital investment of $27.3 billion compared to $31.7 bn invested across 2,500 deals in the second half of 2022. The amount of capital invested in 2023 so far represents a 14% drop from the second half of 2022, a slowdown in investment that started in that half year.
The current slowdown can be partly attributed to concurrent recessionary trends in Europe, the US and China further fuelled by the geopolitical situation in Europe and high inflation that has pushed up Central Bank base rates to levels not seen since before the Financial Crisis of 2008.
Whether retail or sophisticated institutional investors, there is a cautious anxiety still in the market given lack of taming of the inflation in certain western economies and historically highest interest rates since the GFC. Investment flows towards smaller fintechs as well as incumbent Asset Managers has slowed down across public market asset classes but also the alternative asset classes like PE/VC/Growth. …a normalisation will highly depend on the market response to the Central banks policies, and a recession could still turn the tables for the potential growth expectations of the market. We will have more clarity over Q3 2023 whether we slip into several quarters of recession or recover.”
– Erik Mostenicky, Principal of Investment, FISV
Nevertheless, despite unfavourable economic conditions, the average deal size in the FinTech sector has been increasing consistently in recent years. In H1 2023, the average deal size stood at approximately $15.9 million, approximately on par with 2022’s $16.5 million and well above the pre-Covid 2020 average of $12.6 million. Investors seem to commit larger amounts of capital to individual deals, showcasing the sector's resilience and potential for further growth.
The market was very frothy 2021 and 2022 and there’s been a correction. We’ve seen a few deals in our portfolio where revenue is doubled but valuation has been through a correction. In the grand scheme of things it’s no bad thing, but it makes people nervous. Boutique firms are more methodical. We’re not looking for outliers but meaningful steady return.”
– Stephen Lemon, Partner, Volution
Regional differences
The global numbers mask different stages of the investment cycle in different regions. The US actually saw a 23% increase in FinTech investment in the first half of 2023 compared to the second half of 2022 whereas the Rest of the World saw a 38% fall. The US started to fall earlier than the Rest of the World, and would be expected to lead the recovery.
Across Investment Stages
By investment stage, Later Stage VC attracted the bulk of capital, accounting for c.70% of the total compared to 54% for 2022 as whole. As would be expected, Seed capital deals were the largest by number (31% of the total) but only 6% of capital invested, down from 9% in 2022 full year. The trend suggests investors are allocating their capital more strategically towards verticals and growth stages with potential for long-term growth.
Kevin Chong, Co-Founder of Outward VC, explains the volume of deals at the earliest stages, stating “As public markets have corrected and later-stage start-ups look overvalued, VCs around the world turned their attention to early-stage start-ups. In this environment, early-stage founders should take care to optimise their funding rounds - larger rounds and larger valuations may not be helpful in the long term."
Top 10 Global Markets
In the first half of 2023, a global shuffle emerges within the top 10 FinTech investment markets. The United States remains unrivalled at the forefront with $15.6bn invested across 663 deals and the UK holds on to second place with $2.9bn across 199 deals.
For the first time, 4 of the Top 10 markets are from Asia, with China in 3rd place attracing $1.7bn, Singapore in fourth position with $ 764m, India 5th with $729m and South Korea in 9th position attracting $ 390m and Canada rounding out the Top 10 with $324m.
Other FinTech markets have so far experienced notable shifts, with Sweden, often recognised as a cradle for FinTech development, moving outside the Top 10.
It's important to note that these figures represent early 2023 data, offering a glimpse of how the year might still unfold. As we approach the second half of the year, these shifts if maintained might suggest a longer-term paradigm change in global FinTech.
Top 10 European Markets
Europe has seen a reshuffle in FinTech investment. The UK retains its leading position among European markets, with $2.9 bn of investment in the first of 2023, a testament to its vibrant and resilient ecosystem and a leading global FinTech hub. France secured the second spot with $728 million invested across 41 deals. Germany is in third place at the halfway 2023 stage ($536m/33 deals) with Switzerland close behind ($478m/38 deals). Netherlands rounds out the Top 5 with $141m across 16 deals.
Other contenders such as Denmark, and Ireland hold their spots in the Top 10. Meanwhile, Spain, home to a growing number of unicorns and soonicorns, secures a tidy 7th place neck and neck with Sweden. This is Spain's first time ranking in the European Top 10 in the last 4 editions of Innovate Finance’s investment report.
The UK In Numbers
The amount of capital invested into UK FinTech in the first half of 2023 comes to a total of $2.9 bn across 199 deals, down 37% down on the second half of 2022 Of those 199 deals, 111 took place in Q1, comprising $2.0 bn of capital invested. A further 88 deals took place in Q2, representing $864 million.
London takes the lion’s share of investment representing 91% of all capital invested into UK FinTech so far this year.
These figures are not surprising. In the 2022 Innovate Finance Summer Report venture capital investors predicted a slowdown, and we have seen 5 consecutive quarters of reducing new investment since the record first quarter of 2022. With less capital invested and a decreased number of deals compared to the previous year, the figures reflect a slowdown in the UK investment landscape. However, the capital invested in H1 23 was actually higher than pre-covid levels, being 35% up on the first half of 2020
Stephen Lemon, Partner at Volution comments: “The VC market is like any other market. Any other market sees growth, fallback and consolidation. We’ve seen possibly the most challenging environment in several decades: post-Brexit, covid interest rates, supply chain shock. The economy as a whole is taking a breather and VC backed business, as they are naturally speculative, will contract a bit. Is it symptomatic of a more broad problem? No this is where innovation happens.”
Average deal size has also fallen since Q1 2022, reflecting lower company valuations and a desire by companies to minimise dilution for existing shareholders when raising capital at lower valuations.
Across FinTech verticals, investors remain excited about B2B fintech products as Innovate Finance had reported in January, with additional interest in ESG and climate tech, wealth, and artificial intelligence.
We see a lot of M&A discussions now taking place in parallel to a potential fundraise across both successful and struggling startups. Consumer fintechs in particular and other areas like ESG & ClimateTech that attracted a lot of entrepreneurs are a good hunting ground for complimentary capabilities.”
– Erik Mostenicky, Principal of Investment, FISV
Investors like FISV increasingly see the value and potential of “democratising access to institutional investments… carbon infrastructure and professionalisation of the VCM and wealth transfer towards the next generation”.
Dirk Stellar, Founder & Managing Partner at SeedSpace Venture Capital adds, “:We are seeing a shift from an appetite for growth assets to an appetite for income assets… Those investors that have a long term view on tech based growth assets are finding strong investment opportunities in the current market.” While crypto markets remain soft, he comments, investors are curious to see how much “consolidation and restructuring [is] needed before this asset class can move into a growth phase once more.”
Female Founders
Innovate Finance identified only 10 female founded or co-founded companies that completed venture deals in the first half of 2023. The 10 deals netted a collective $62 million from Seed Series through Series C. This takes female-driven FinTechs to represent a very low 2.2% of venture investment in the UK compared to 4.9% in full year 2022.
Nina Foote, Partner and Head of Growth at Volution VC, says that VCs are taking a methodical approach to improve diversity at the earliest stages of company building and incubation: “Groups like EU Women in Venture are [growing in prominence because they are] designed to drive diversity overall. Individual VCs like us are putting policies in place to bring in and make female founders heard. We’ve opened office hours [to advise founders], looking at stats of our portfolios, and openly asking for diversity stats at board level and employment…I’m hopeful that there is work behind the scenes” that will be reflected in wider diversity data soon.
Not included in the total amount of capital invested in female-led businesses are the acquisitions of Molo Finance and GoHenry. Molo Finance, founded by Francesca Carlesi, was acquired by Australian investors ColCap as part of their strategic entry into the UK market, for an undisclosed sum. GoHenry, spearheaded by Louise HIll, announced its acquisition by Acorns on 6th April 2023.
Looking Forward
The global FinTech investment landscape has faced its share of challenges in the past year. The economic slowdown and inflationary pressures have impacted the sector while the resilience of the FinTech industry continues to attract capital and encourage innovation.
Despite a decline in global investment from H2 2022 to H1 2023, established FinTech companies continue to adapt among economic restraints - encouraging investment across key areas such as open banking, B2B solutions that excited investors into 2022, as well as crucial newer verticals including ESG, pensions, and financial wellbeing.
Generative AI has also piqued investor interest as a key driver of financial and business solutions. Kevin Chong, Co-Founder of Outward VC, says “Following a decade of fintech defined by the super cycles of mobile and cloud technologies, the next phase of fintech will likely be defined by generative AI. I am also excited to see an emerging category of start-ups that link fintech, climate tech and cleantech to solve truly global issues.”
Investors continue to advise innovators that as the fundraising market may remain selective, streamlined operations and innovative solutions will be crucial for FinTech companies to achieve sustainable growth. Globally, the average deal size has remained steady, showcasing investors' confidence in the sector's potential for further expansion.
Nevertheless there remain key areas where improvement is crucial, including the funding of diverse innovators. Female-founded or co-founded companies make an ever smaller proportion of the UK FinTech landscape.
As the sector moves forward, investors and startups alike are watching the second half of 2023 for indicators of economic recovery and lower inflation rates in order to pick up the pace of investment in 2024.
