Just a few months ago, I started writing an article under the title, “The year that Fintech matured”. 

At the time, the headline couldn’t have been more accurate. Decacorns were no longer a rare sighting: we’d seen Coinbase hit an $86 billion valuation (higher than UBS) after its IPO, Klarna reaching a $46 billion valuation (higher than Barclays) after their $600million+ raise, while Brazilian fintech Nubank hit a $41.5 billion valuation post-IPO (higher than the country’s largest bank). In 2021 alone, investors gave fintechs $170bn to fuel growth. 

Over a matter of weeks in 2022, the climate quickly turned. The tech-dominant NASDAQ plummeted, recording its worst months since 2008. Redundancies have been widespread, with fintechs like Bitpanda and Freetrade, letting go of swathes of staff and VC and fintech founders little secret, the ‘Down Round’, was all over Twitter, with Klarna raising at a 85% lower valuation than their previous round. 

Being immersed in the ecosystem—launching new fintechs, helping founders scale and investing alongside Aviva, I have been feeling the impact of this paradigm shift from all angles. 

So what has changed, and what has remained the same? As I get flashbacks to 14 years ago I’ll aim to reflect on the fintech market downturn, predict what the next 12 months may have in store, and propose the founder mindset required to win in this market.

Read for insights into:

• The options that remain for founders, with IPOs and huge funding rounds largely off the table

• Tips on how to extend your runway and consolidate your current position

• Switching from a growth-at-all-costs mindset to a profitability mindset

• Why the current market may favour new ventures over incumbents

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What might the next 12 months look like? 

The IPO exit door is shut

As investors seek safe harbour in value stocks, a growth-at-all-costs narrative no longer flies, and valuations of publicly traded Fintechs have plummeted. This is likely to make IPO an unviable exit route for founders (and their VC backers) for the next 12-to-18 months. Those just about to be on the 2022 IPO block (Monzo, Revolut, and N26 will be looking for alternative ways to raise money to fuel growth. With one exit door closed for now, have founders (and their investors) got the patience and energy to extend the journey and can they turn the tanker from growth to profit fast enough?

Megavaluations and huge funding rounds won’t return for some time

For the time being, consider huge funding rounds and mega-valuations extinct (although Klarna’s recent $800 million round is still one of the biggest raises of the year). Megavaluations reflected an investment thesis that, for these companies, growth was inevitable and never ending.  The investment models used by VCs to determine their level of return is underpinned by IPO as the exit option (especially in later stage VC) so as the IPO door shuts reducing the exit options valuations are further compressed. This may be exacerbated by later stage funds having to divert capital towards suring up existing investments.

Big fintechs will look to consolidate and acquire

For the new breed of Fintech Decacorns born out of the bull run and filled their boots before the crash, ‘Baller’ acquisitions could be the growth lever they chose to pull. Pre-crisis, we saw Block acquire Afterpay for $29 billion, and Robinhood acquire UK crypto platform Ziglu. Expect to see more of this from well funded Fintechs, who will use their large cash reserves to consolidate their position, buy growth through acquisition and diversify revenue streams. We may even see the big old banks make moves as Fintech becomes a buyers market and they can acquire much needed tech cheaper than they can build.

Big Tech will continue to eat Fintech

Cash-rich Big Tech firms will double down on building fintech offerings and acquisitions—their share prices have been hit hard but they remain highly profitable and cash generative. In the last twelve months, Apple started to make moves at the height of the market: acquiring payment terminal startup Mobeewave and open banking data startup Credit Kudos, while also launching a ‘Tap to Pay’ feature that will allow iPhones to accept contactless payments. Scott Galloway identified banking as one of the biggest revenue opportunities for Apple in the next decade—a possible $75 billion in the bank. This type of environment plays perfectly into the hands of Big Tech: they know consumer demand for Fintech remains so now could be the right time to pounce.

In sum: Fintech valuations are down and staying down for the next 12 months. 

Investors see fintechs facing a series of challenges with a recession looming, ecommerce growth softening, increasing cost of capital and increasing operating expense due to inflation. This is leading investors to have a more pessimistic view of future performance, anticipating slower revenue growth, a longer path to profitability and lower margin at scale. For profitable fintechs with large war chests it could be a feeding frenzy.

Despite the bleak outlook at present, almost everyone you speak to in fintech remains bullish on the long term outlook of the sector. The problems that fintechs solve for customers remain, and enabling technologies continue to unlock cost advantages over traditional banking. Moreover, startups that can remain capital-light and tech-led will continue to drive high valuations (especially compared to those with heavily-laden balance sheets). 

To survive a storm is an incredible experience for any founder, and the stakes are particularly high this time. Fintechs that are able to navigate this correction well will come out in a winning position.