Fintech/Analysis/ Fintech deals have officially retreated to pre-2021 levels The latest data shows that investment into European fintech has retreated from last year’s record levels By Amy O'Brien 12 July 2022 Steve Anavi and Alexandre Prot, the cofounders of Qonto, which has raised 2022's second-biggest round Steve Anavi and Alexandre Prot, the cofounders of Qonto, which has raised 2022's second-biggest round \Fintech Which European banking app is winning the race for customers? By Amy O'Brien 21 February 2023 Fintech/Analysis/ Fintech deals have officially retreated to pre-2021 levels The latest data shows that investment into European fintech has retreated from last year’s record levels By Amy O'Brien 12 July 2022 The most recent figures for European fintech show investment slowing from 2021 highs, more proof that the sector is feeling a chill amid the fall in tech stocks and concerns about an economic downturn. So far this year, Dealroom figures show that European fintechs have raised $13.2bn — still a solid overall sum, but the lowest six-month total since 2020. The picture is even bleaker just looking at the second quarter, when companies raised $5.5bn, the weakest quarter since the beginning of 2021. “It seems like in 2021 there was a lot of willingness from investors to underwrite deals where the problem being addressed wasn’t an artificial one and the market was huge, but maybe the current iteration of the business model needed work,” says Khalil Hefaf, investment manager at Target Global. “Now there’s a lot more focus on margins and a concrete path to profitability, given the financing squeeze.” Just like the first quarter, the second quarter’s overall figure was buoyed by later-stage megarounds like Bloom’s mammoth £300m Series A, Paddle’s $200m Series D and Taxfix’s $220m Series D — as all three joined the fintech unicorn club. A number of larger fintechs also did follow-on rounds to maximise runway amid the economic uncertainty. The sector closed 289 rounds in the second quarter as of data pulled Monday, down from 307 in the first quarter and the consecutive 300+ quarterly totals it’s drawn in since Q4 2015. Founders that closed rounds in the second quarter describe consistent investor interest, but an increased focus on the path to profitability when pitching. Meanwhile, investors say that while some of the froth may have come off the market, there’s still considerable competition for deals with companies with the strongest business models. “Essentially, this period will sift between the nice to haves and the must haves,” Hefaf adds. The down rounds begin As the region’s most valuable startup, Klarna is a pretty good benchmark for what’s going on in the wider sector. When it laid off 10% of its global workforce in late May, a slew of other fintechs began to follow — including Nuri, Uncapped, Curve and Bitpanda. And now, it’s raised $800m in a funding round that’s slashed its valuation by more than 85% to $6.7bn — down from $45.6bn this time last year. That’s knocked it far off the top spot as Europe’s most valuable fintech. But VCs tell Sifted it’s only a matter of time before this trend trickles down through the sector. “We would not be surprised to see corrections happen across the board, and Klarna is foreshadowing this,” Hefaf says. “In the absence of significant improvement on KPIs, it will be very difficult to justify valuation uplifts. Higher interest rates will fundamentally lower the future value of the cashflows of the high-growth companies being sought after.” Last month, UK payments startup SumUp became the first fintech in Europe to have its valuation slashed when it raised €590m at an enterprise value of €8bn — less than half the figure it was previously pegged at. And so do the follow-on rounds … Later stage fintechs also used the second quarter as an opportunity to boost their coffers to weather the economic uncertainty by tapping existing investors in some sizeable follow-on rounds. Two of the second quarter’s largest rounds were extensions: Berlin-based trading app Trade Republic scored a €250m extension to its $750m Sequoia-led Series C, and the UK’s Starling Bank tapped existing investors for £130.5m to “build its war chest for acquisitions” after its £322m Series D round last year. And while the biggest BNPL giant, Klarna, struggled to maintain its valuation, two smaller rivals — Scalapay and Zilch — managed to convince their investors they were worth backing with a bit more cash. In May, Scalapay raised a $27m extension to its $497m Tencent-led Series B in February, and in June, Zilch secured an additional $50m, taking the total it’s raised in its Series C to $160m. European fintech’s 10 largest rounds Checkout.com’s massive $1bn Series D in January oustrips all other funding rounds in the first half of the year, followed by SumUp’s €590m round in June, and GoCardless’s entry into the unicorn club with its $312m Series G in February. Seemingly out of nowhere, London-based revenue-based financing startup Bloom burst onto the venture-backed scene in May with a massive $377m Series A led by Credo Capital and Fortress Investment Group LLC. This makes it one of the most well-capitalised fintechs in the space, and is a vote of confidence in the lending model from investors despite fears of rising interest rates. After SumUp and Trade Republic’s hefty rounds, Berlin-based tax filing app Taxfix scored one of the period’s largest rounds in a $220m Series D led by Teachers’ Venture Growth — and became one of the Q2’s two new additions to the fintech unicorn club. The second newly minted unicorn was London-based payments SaaS startup Paddle, which hit a valuation of $1.4bn in a $200m Series D in May. Sweden’s niche neobank Juni made it into the top 10 with its $100m equity Series B in June, as did British fintech SaaS company Codat, which raised $100m in a Series C led by JP Morgan’s venture arm. Payments rules the roost When it came to fintech subsectors, it might come as no surprise that payments continued on its winning streak and dominated funding in H1 2022, receiving $3.8bn — up from $2.1bn in the last quarter. Interestingly given the rising interest rates and inflation in the period, wealth management rose up the ranks from the fifth most popular subsector in Q1 2022 to the second most popular subsector among investors in H1, attracting $3.4bn investment overall. Crypto has had a rocky few months, as the market lost over $1tn in value and several cryptocurrencies collapsed. But the sector still managed to appear in the top 10 fintech subsectors in the first half of the year, attracting $1.3bn — about half the $2.7bn total funding it received in 2021. This could be because some deals were closed before the crypto winter began — all eyes will be on whether VCs remain this keen in the second half of the year. And we couldn’t help noticing the number of fintech API software seed rounds that closed in the period, as investors bet on B2B fintechs that can help other companies streamline operations in the current economic climate. In just one week in June, Sifted spoke to “crypto as a service” startup Pile about its pre-seed, investment API provider Upvest about its Series B and payment flows API Formance about its $3.1m pre-seed. “Fintech can be quite resilient as a sector, and some sectors such as better tools for CFOs to track spend, cashflow forecasting or scenario planning are needed more than ever in these troubled times,” Lucile Cornet, partner at Eight Roads, tells Sifted. “We also continue to track some secular trends in fintech — such as A2A [account to account] payments, the institutionalisation of crypto, or open insurance — which are multiyear bets for us VC investors.” Biggest locations for fintech investment Carrying on the trend from the last few years, the UK has continued to dominate European fintech funding, coming out on top with $7.2bn invested in total so far this year. France has had a particularly strong first half, having overtaken Germany (which occupied second place for 2021) in the first quarter. It maintained second place for the entire first half, attracting $2.2bn investment into its fintechs — already nearing the $2.5bn it attracted in the whole of 2021. What lies ahead? Despite some valuation crunches and a slight slowdown in overall funding, investors and founders tell Sifted they remain pretty confident in European fintech’s ability to attract investment — albeit at a calmer pace than in 2021. When it comes to competition for deals, investors point to how many crossover funds and family offices that dabbled in VC in 2021 are taking a step back — but that among VCs, a renewed focus on the best quality business models means more investors are chasing the same deals. “Fewer companies satisfy the criteria, so you tend to have more investors looking at the same time,” says Hefaf. As fintechs are so closely tied to the financial markets, investors expect some subsectors that are less exposed to macroeconomic headwinds to be more popular than those in the crossfire. Those that rely on debt facilities, like BNPL and revenue-based financing, are among the most exposed to rising interest rates. Meanwhile, founders describe a more challenging fundraising environment at mid-to-late stages than earlier stages has emerged so far. “I heard from many founder friends that it’s been harder to raise Series A and Bs, so many have been going for extensions instead,” Jessica Holzbach, founder and CEO of crypto API provider Pile, which raised its €2.8m pre-seed last month, tells Sifted. A sector that has attracted quite a bit of attention from investors in the current climate is B2B BNPL — a rapidly expanding club of fintechs that provide loans to businesses rather than consumers to help them manage their cashflow. One such fintech is Hokodo, which raised a $40m Series B in a round led by Notion Capital last month. Cofounder and co-CEO Louis Carbonnier tells Sifted that while the company’s pitch deck remained unchanged, investor scrutiny definitely increased as the fundraising process went on. “As it was a Series B, there was no expectation for us to be profitable at the time of our fundraise, but in 2022 there was a clearer focus on our unit economics, our underwriting performance and the overall path to profitability of the business,” he says. “What evolved was the follow-up questions asked by investors — we could feel a heightened focus on profitability and underwriting discipline.” Meanwhile, if private fintech startups have enough runway to hold tight, they may be more cushioned from the macroeconomic environment than their public peers. “So far the numbers show some softening but still relatively high levels of activity — VC rounds and valuations remain high compared to the correction seen in public markets,” says Cornet. “I think there is still appetite among VCs for top assets with strong teams and strategic positioning, and while I expect H2 VC deployment to be much lower than 2021 levels, it’ll maybe not be as bad as everyone seems to think.” Amy O’Brien is Sifted’s fintech reporter. 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