The year fintech lost its perch
Don't panic but fintech's lost the European VC top spot for the first time in years
Fintech has been the standout category for venture capital investors in terms of the total amount raised for a long time.
And for good reason.
Globally, financial services is one of the most profitable, high-margin activities with a slew of large incumbents - somewhat lacking in both digital agility and empathy for their customers.
Pair this with software eating the world and a broadly growing global population base with growing demands for wealth, payments, credit and banking services and you have quite the potential to make a lot of money.
For more than a decade the global fintech trend has grown in intensity, increasing more than 24x in annual volumes over this period.
More and more investors plied more and more capital into fintech startups and scaleups reaching a covid crescendo in 2021 when $28.9bn was raised in Europe alone in the fintech category.
Data out this week show fintech is still pulling in the big bucks in terms of venture capital invested into startups and scaleups in Europe with a $5.2bn raised, according to Dealroom.
For the first time since 2019, however, fintech companies have been knocked off the top spot by another hot venture category: energy.
Dealroom’s data show a whopping $10.7bn has been raised by companies looking to upend the energy market so far this year. More than double the figure for fintech.
By comparison, last year fintech raised $23.9bn with energy startups clocking up $14.1bn of investment.
With a quarter of the year still to play for, fintech’s funding number is likely to increase. However, unless dozens of companies raise some very, very large rounds 2023 looks set to finish with fintech playing second fiddle.
The reason for this surge in energy investments is three-fold.
One, sky-high energy prices across oil, gas and clean energy show the vast returns for a market with unlimited demand from consumers and companies.
Two, energy security is becoming more important in what is quickly becoming a less globalised market owing to the Russian invasion of Ukraine. Major countries that are energy exporters such as the US have been quicker to tame inflation than energy importers such as the UK where official figures show much of the overall inflationary pressure is coming from outsized increases in energy prices.
Lastly, climate change. The most important reason. Investors, policymakers and consumers are starting to wake up to the threat of climate change and responding.
Despite ongoing tiffs over the implementation of net zero policies, the direction of travel is now clear. Investors are tripping over themselves to fund carbon-cutting startups as regulations prompt action.
The largest venture-backed funding rounds across the board this month have come from the energy sector. Northvolt, a Swedish lithium-ion battery producer, for example, raised $1.2bn and Redwood Materials, also in the battery space, raised over $1bn.
A fintech comeback
While the threat of climate change is not going away, suggesting investors will continue to fund energy startups offering innovative solutions, there are reasons to expect a fintech bounceback.
Firstly, economists are increasingly aligned that the rapid rate rise environment created by central banks in response to surging inflation is working at taming prices. We’re not out of the woods yet but the policy appears to be meeting its goals.
Interest rates were kept on hold by central banks in the US, UK, Switzerland and Japan this week instead of being further tightened.
Fintech venture capital volumes are likely to respond well to this, which should also affect public - and in time - private market valuations.
Secondly, fintechs have by and large been eschewing fundraising and instead pushing for profitability and/or extending runways by cutting jobs and marketing budgets.
This cannot go on forever.
Fintech companies that raised huge rounds in 2021 are poised to return to capital markets imminently while those that will take part in a renewed push for public market listing will add even more fuel to the fire.