Amsterdam-based Finch Capital, a European thematic growth investor, announced on Thursday that it has published a ‘State of European FinTech’ report, which forecasts a period of cooling and consolidation across the fintech sector as macroeconomic conditions grow more challenging.

Finch Capital says the European fintech sector has grown significantly, with a fintech funding volume of around $6B in 2020 to about $19B in 2021. 

The total number of fintech exits globally also peaked in 2021 at 966. Over the same period, fintech investment globally topped $210B, with crypto and blockchain businesses performing especially well. 

In the recently published report, Finch Capital assessed four key trends in fintech as proxies for the sector’s health. They are: 

The report from Finch Capital reveals that fintech investment has slowed due to uncertainty over economic conditions this year. While the business formation in the fintech sector peaked in 2018, it has declined by 80 per cent over the last year,  adds the report. 

Since Q2 2022, public tech markets have returned to 2019 levels after a strong rally since 2020. 

Private markets are also undergoing a similar but slower transition to 2019 valuation levels, wiping out the 200-300 per cent growth in valuations during 2020-2021. 

According to the report, the decline happened at the same time as when IPO and large venture M&As decreased by 70 per cent. It means that there are fewer opportunities for big exits, and venture funding, especially in the form of ‘megarounds,’ has become less available.

In 2021, Europe’s top 20 funding rounds accounted for 50% of the market. However, across the investment ecosystem, there has been a 25 per cent decline in funds raised by fintechs.

The report also emphasises the decline in recruitment in fintech, with new hire growth down 50 per cent. 

Europe accounts for 10 per cent of total reported fintech layoffs globally, despite receiving 25 per cent of global finTech funding. 

Nevertheless, the sector is still hiring, with around 10% of FinTech firms currently advertising vacancies, adds the report. However, existing vacancies are more focused on revenue generation (such as sales roles) and less on technical skills, such as engineering. 

Dry powder is a term used in private equity to refer to a firm’s cash available to invest. It can fund new investments, help existing portfolio companies grow, or finance other activities such as share buybacks.

The research indicates that dry powder is at an all-time high with $28B of undeployed capital among Fintech investors.

The report implies that these levels of dry powder are not sustainable, with a 40% decline in new funds raised in 2022 vs 2021. 

As a result, funding will not dry up in the short term for companies who show healthy unit economics, opportunity, and growth potential, providing an opportunity for a soft landing, notes the report. 

Radboud Vlaar, Managing Partner at Finch Capital, says, “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. However, this doesn’t mean funding has dried up, simply that investors are becoming more discerning and price sensitive. Our research indicates that dry powder is at an all-time high, with $28B of undeployed capital among Fintech investors.

He continues, “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.” 

“There was always an element of uncertainty around the long-term sustainability of valuations for certain companies, particularly at growth stages. This shake-up, while painful, is also necessary. Consolidation and more competitive investment flows, combined with still significant levels of undeployed capital, will bring maturity to the FinTech sector. And, despite difficult near-term prospects in the economy at large, a new normal level of activity will resume in FinTech over the next 12 to 18 months, focusing on long-term sustainability,” he says.  

Based out of Amsterdam, Finch Capital currently focuses on three themes: Financial, Real Estate, and Health technology. The Dutch firm backs companies generating €2M+ in ARR by investing €5M to €10M initially and helps them scale to €30M-€50M revenues by building sustainable and capital-efficient business models. 

Finch Capital has invested in approximately 45 companies, including Fourthline, Goodlord, Grab, Hiber, Twisto, AccountsIQ, ZOPA, and Symmetrical.

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