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Fintech funding slowdown accelerates in H1 2023

Fintech funding slowdown accelerates in H1 2023

UK fintech funding has dipped in the first half of 2023, as total cash raised reached $2.9 billion in the first six months, a 37% slump compared to the later half of last year, according to new figures from industry body Innovate Finance.

The fintech sector globally has faced significant challenges over the past year, including high inflation, rising interest rates, cash flow constraints and cautious investment sentiment. In the first six months of 2023, a total of $27.3bn was invested across 1,711 deals globally, representing a 14% decline from H2 2022 to H1 2023.

Stephen Lemon, partner, Volution, comments: "The market was very frothy 2021 and 2022 and there’s been a correction. We’ve seen a few deals in our portfolio where revenue is doubled but valuation has been through a correction. In the grand scheme of things it’s no bad thing, but it makes people nervous. Boutique firms are more methodical. We’re not looking for outliers but meaningful steady return.”

Nevertheless, despite unfavourable economic conditions, the average deal size in the fintech sector has been increasing consistently in recent years. In H1 2023, the average deal size stood at approximately $15.9 million, approximately on par with 2022’s $16.5 million and well above the pre-Covid 2020 average of $12.6 million.

By investment stage, later stage VC attracted the bulk of capital, accounting for c.70% of the total compared to 54% for 2022 as a whole. Seed capital deals were the largest by number (31% of the total) but only 6% of capital invested, down from 9% in 2022 full year. The trend suggests a re-focus towards investment in established fintechs during the market downturn.

Average deal size has also fallen since Q1 2022, reflecting lower company valuations and a desire by companies to minimise dilution for existing shareholders when raising capital at lower valuations.

Across fintech verticals, investors remain excited about B2B fintech products, with additional interest in ESG and climate tech, wealth, and artificial intelligence.

Erik Mostenicky, principal of nvestment, FISV, says: "We see a lot of M&A discussions now taking place in parallel to a potential fundraise across both successful and struggling startups. Consumer fintechs in particular and other areas like ESG & ClimateTech that attracted a lot of entrepreneurs are a good hunting ground for complimentary capabilities.”

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