European fintechs are facing a logjam in money supply as investors become more discerning, a new report by Finch Capital found.
The ‘State of European FinTech’ report, published on 13 October, forecasted that fintech demand funding was on course for a 50% decline because of fewer mega-rounds and investments diverted into high-growth sub sectors like crypto.
According to the report, available European capital remains at an “all-time high”. However, corporate VCs are doing 50% fewer deals and institutional VCs are raising less frequently.
The report was upbeat, pointing out that dry powder is at an all-time high with $28bn of undeployed capital among fintech investors. However, with an anticipated 40% decline in new funds raised in 2022 vs 2021, it suggested these levels were not sustainable and investors would focus on the strongest startups.
The report stated: “Funding is not going to dry up short term for the better companies who show healthy unit economics, opportunity and potential for growth providing opportunity for a soft landing.”
The shift will impact Luxembourg, which is home to more than 250 fintechs, generating over €500m in revenues. Fundtech, payments, regtech and blockchain make up almost two-thirds of startup activity in this sector, according to a recent member survey by incubator the Luxembourg House of Financial Technology. Since it was established in 2017, the incubator estimates that its members have raised over €1b in funding. Europe fintechs experienced a massive funding jump from $6b in 2020 to $19 b in 2021.
“Funding is not going to dry up short term for the better companies who show healthy unit economics, opportunity and potential for growth providing opportunity for a soft landing.”
‘State of European FinTech’ report
“After many years of impressive growth, perhaps overheated, there is no doubt that a worsening macroeconomic situation and tightening money supply are weighing on the FinTech sector. This doesn’t mean that funding has dried up, simply that investors are becoming more discerning and price sensitive,” Managing Partner at Finch Capital Radboud Vlaar said, adding: “With investors becoming more cautious about where they put their money, and potentially overinvested start-ups struggling to exit, we are likely to see a period of consolidation in the FinTech space as many verticals are highly fragmented, creating a smaller but more sustainable ecosystem.”
The report also found that new business formation in the fintech sector peaked in 2018 and declined 80% over the last year, while recruitment declined 50%. The report said that around a tenth of fintechs were advertising vacancies in positions focused on revenue generation as opposed to technical skills. This, it said, showed a “shift towards a less well-funded and more competitive landscape.”
