The Fintech Funding Landscape: Navigating Turbulent Waters

The fintech industry faced a sobering reality in 2023 as global investment plummeted by 48% compared to the previous year. This sharp decline, from US$33.4bn in 2022 to a mere US$12.5bn in 2023, sent shockwaves through the sector, forcing companies and investors alike to reassess their strategies and priorities.

Nicolai Chamizo, CEO and Co-founder of Incore Invest, views this decline as a reflection of a more cautious market, emphasising “the need for fintech companies to enhance their focus on sustainable growth and profitability”. 

He suggests that this shift should encourage founders to "evaluate and refine their business models, ensuring they deliver tangible value and operate with heightened efficiency”.

This perspective is echoed by Ivan Nikkhoo, Managing Partner at Navigate Ventures, who sees the current situation as a "natural correction" in the fintech sector. 

Ivan explains that in recent years, “fintech investment surged due to its favourable risk-to-reward profile, attracting significant capital and prompting many companies to position themselves as fintech players”.

However, as the funding boom cooled, many of these companies faced challenges, resulting in a pullback from the sector.

Ivan further elaborates on the impact of this correction: “As capital became scarcer, the inevitable flight to quality occurred, and less experienced investors and entrepreneurs faced challenges, resulting in a pullback from the sector. 

“Many companies entered fintech to capitalise on high valuations, but as the funding boom cooled, this trend reversed.”

Market conditions and investor approach

The current market conditions are shaped by a complex interplay of factors. Nicolai points out that “economic uncertainty, rising interest rates and geopolitical tensions” have significantly tightened capital availability. 

In response, investors are adapting to new financial parameters, fundamentally impacting their risk-reward landscape.

Ivan adds: “We’re seeing a return to normalcy, where investors are prioritising sustainable business models and realistic risk-to-reward ratios.” This shift has led to an emphasis on capital efficiency, reduced burn rates and a clear path to securing future investments.

The focus has moved from rapid growth at all costs to prioritising resilience and extended runways. As Nicolai notes: “Fintechs that can demonstrate robust market resilience, and maintain extended runways to navigate prolonged periods of downturn, are the ones most likely to attract investment.”

Yanki Onen, CEO of wamo, offers additional insight into this shift in investor mindset: “Such tough market conditions and scarcity in cash have resulted in a mindset shift amongst VC investors from 'growth at all costs' to 'sustainable growth' with an emphasis on the longevity of their investments.”

However, Yanki also sees a silver lining in this more cautious approach: “There is, however, an upside to risk-averse and cautious investing. Businesses that gain investment during economic downturns can have confidence that they are expected to do well in the future.”

Resilience and opportunity amid adversity

Despite the funding crunch, the fintech industry has demonstrated remarkable resilience. This resilience speaks to the enduring appeal of fintech innovations and the sector's potential for long-term growth. Nicolai sees this challenging period as an opportunity for innovation and growth.

“The slowdown in funding may act as a catalyst for innovation,” he says “driving the strongest and most adaptable fintechs to the forefront of the industry. It will encourage less competitive players to reassess their offerings, potentially leading to market consolidation where only the most robust companies survive and thrive.”

Ivan adds: “Genuinely sustainable fintech firms have continued to thrive. This decline represents a healthy regression to the norm, paving the way for the best companies to thrive, increased mergers, acquisitions and acqui-hires as the sector matures, and redistribution of talent to where they are most valuable.”

Geographical landscape of fintech investment

While the United States continues to dominate the global fintech investment landscape, other markets are emerging as significant players. The United Kingdom has solidified its position as the third-largest venture capital market globally, accounting for 6% of global investment.

Yanki attributes the UK's success to “innovative startups and a supportive regulatory landscape”. He highlights the role of the Financial Conduct Authority (FCA) in supporting innovation, citing its launch of an innovation hub and regulatory sandbox to support innovative business models.

Yanki also draws parallels between the UK and emerging markets: “As a fintech headquartered in the UK that has benefited from UK investment, we can attest to the VC landscape here. 

“Uniquely, we can also talk to the growing Turkish investment space, as we recently welcomed a Turkish VC firm as a new investor in our bridge to Series A funding round. 

“What the UK and Turkey have in common is their flourishing fintech/tech startup scene that attracts investments from both domestic and international investors.”

Beyond the traditional powerhouses, new markets are gaining traction. Nicolai points to Latin America, particularly Brazil, as a region with a “rapidly developing tech scene, driven by both necessity and opportunity”.

He elaborates: “The country's fintech sector is catalysing innovation, addressing gaps in a previously underserved market and attracting significant investment. As Brazil continues to mature as a tech hub, it is positioning itself alongside established markets across the globe - and a key player to watch.”

Ivan adds: “Israel remains a robust market and the Baltics and Northern Europe are gaining momentum with strong tech talent and focused capital.” He also notes the rise of Gulf regions, particularly Dubai and Saudi Arabia, which are “actively working to establish their own venture ecosystems”.

Emerging focus areas and the future of fintech

As the fintech landscape evolves, venture capitalists are turning their attention to new and promising areas. These include the development of Central Bank Digital Currencies (CBDCs), improved security measures like biometrics, and financial inclusion solutions.

Nicolai explains that these emerging segments are attractive because “they address significant changes that continue to impact the financial landscape, especially as they continue to meet pressing global needs.” 

For instance, the focus on improved security measures is “in response to the growing demand for improved protection in an era of increasing cyber threats”.

He elaborates on the importance of security in today's digital world: “As the way we pay becomes more digitised, the need for robust and secure authentication methods is important. 

“VCs are backing these innovations because they not only meet current security demands but also lay the groundwork for future-proofing digital finance.”

Ivan described CBDCs as “a significant evolution in how governments manage money, offering the potential for greater efficiency, transparency and inclusivity in financial systems”. He sees this as an opportunity for VCs to “back innovations that could revolutionise payment infrastructures and the broader economy”.

Financial inclusion solutions are also gaining traction, particularly in regions where large populations remain underserved by traditional banking systems. By supporting fintechs that bridge this gap, VCs are not only tapping into a growing market but also driving social impact.

Ivan says: “Financial inclusion has become a major priority, particularly in underserved markets. Solutions aimed at bringing financial services to the unbanked or underbanked populations present a massive growth opportunity. By investing in these areas, VCs not only target high returns but also contribute to the global push for more equitable access to financial services.”

Looking ahead: Challenges and opportunities

While the current funding environment presents challenges for the fintech industry, it also offers opportunities for consolidation and innovation. Companies that can demonstrate resilience, profitability and alignment with emerging trends are likely to attract investor interest, even in a more cautious market.

Nicolai aptly describes the current situation as “a form of fintech Darwinism, where a more challenging macroeconomic landscape compels companies to innovate out of necessity, ultimately leading to a more resilient and mature fintech landscape”.

Yanki concludes with advice for emerging markets looking to develop their VC ecosystems: “As other markets develop their VC ecosystems, they should look to the UK's model in particular for inspiration and aim to replicate its approach to nurturing startups and drawing in investment.”

To read the full story in the magazine click HERE

Make sure you check out the latest edition of FinTech Magazine and also sign up to our global conference series - FinTech LIVE 2024

FinTech Magazine is a BizClik brand ​​​​​​​