Fintech deals and dollars are falling quarter over quarter, reflecting broader market uncertainty and potentially tough times ahead. We examine where startups in the space go from here.
Fintech has been on a tear over the past couple of years, with record funding levels and rising valuations. With so many companies competing for market share, fintechs have prioritized growth and customer acquisition over profitability.
The coronavirus outbreak has ended this growth-at-all-costs environment. Funding conditions have undergone a 180° shift, and the future of fintech has changed dramatically.
To compensate, startups in the space will need to focus immediately on balance sheet health and cash flow management — which may prove to be difficult for the most aggressive growth stories.
Looking at the data through the end of March, total deals and dollars to fintech companies are down month-over-month, quarter-over-quarter, and year-over-year.
While the past 3 years all saw between 200 and 300 deals in the months December through March, 2019-2020 is seeing between 100 and 200 deals over the same period.
Also of note, deals are falling across geographies, implying that Covid-19’s impact on the fintech space is global. Asia, Europe, and North America are set to see the lowest quarterly deal count in years.
Total funding is also set to drop. At the current pace, funding to fintech companies for Q1’20 will likely settle at around $6B — a level not seen since 2017.
What does this mean for the fintech space?
As evidenced by almost all asset classes, investors are currently liquidating assets to fortify their cash positions. Fintech companies should be following suit, as raising funding in the current market will likely prove exceedingly difficult — and expensive.
A flight to cash will mean that fintech companies will have to tighten their belts, and focus more on profitability and positive cash flow than growth at all costs. This represents a marked shift from the past decade, which saw companies raise massive amounts of capital without showing profitability.
From a funding perspective, a flight to cash means that LPs and GPs will be more judicious with their investments and terms. This will make for a more difficult funding landscape for earlier-stage fintech companies, who will have to compete with better-capitalized and larger firms for a smaller pie of venture funding.
A sustained economic slowdown would reduce consumer and business spending more than what has already occurred. In turn, this would result in less transaction-based revenues for many fintech companies.
Additionally, lenders could see a shock as consumers and businesses alike are unable to service their debts. This could be mitigated with broad government assistance, though this is not yet fully fleshed out.
Ultimately, in a frozen economy, fintech companies will have serious financial challenges ahead if they are unable to reduce costs or rely on their balance sheets to get them through this difficult period.
This report was created with data from CB Insights’ emerging technology insights platform, which offers clarity into emerging tech and new business strategies through tools like:
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