Europe’s fintech boom is rapidly exhausting

Is Europe’s fintech boom on the brink of extinction? New data from investment manager Finch Capital suggests it may well be. A period of record fundraising seems to have come to an end, the data shows that the number of exits is decreasing and the influx into the sector has also decreased.

Finch Capital’s research predicts that European fintechs are now entering a period of cooling and consolidation, with the economic headwinds facing the continent starting to take their toll. As fintechs continue to raise money, complete exits and hire staff, they now appear to be returning to a more modest rate of growth.

The slowdown follows a remarkable period for the sector. In 2020, European fintechs raised $6 billion in funding; last year, that figure rose to $19 billion. FinTech exits also peaked in 2021.

This year, on the other hand, has fallen 25% so far in funds raised by European fintechs, data from Finch Capital shows. In the meantime, hirings have fallen by 50% compared to 2021. The number of exits in some parts of the market has fallen by as much as 70%.

The slowdown coincides with a sharp correction for tech companies in the public markets, where a global sell-off this year has pushed valuations back to levels last seen in 2019. Much of the 200-300% growth achieved in 2020 and 2021 had been abandoned.

The private sector now seems to be following suit – and Finch Capital’s research also reveals a notable slowdown in the number of new fintech launches. In fact, new company formations peaked in 2018, but the number of startups has fallen by 80% in the past year.

“We were surprised by the slowdown in startup numbers, which occurred despite a remarkable amount of stimulus from governments across Europe,” said Radboud Vlaar, managing partner at Finch Capital. “It’s also clear that many fintechs are not growing at the pace they once promised.”

One factor in the industry’s slowdown may well be the hugely attractive employment prospects the industry has offered over the past two years. With so many fintechs competing for the best talent in a market where skills shortages are rife, people who might otherwise have started their own ventures may have chosen to take on high-paying positions instead.

More generally, Vlaar also warns that a sense of risk aversion is now slowing the growth of fintechs. “There is no doubt that a deteriorating macroeconomic situation and a tightening money supply are weighing on the fintech sector,” he said. “This does not mean that funding has dried up, just that investors are becoming more critical and price sensitive.”

Finch Capital’s research suggests that some fintech subsectors are doing better than others. Vlaar points to regtech as a part of the market where business is holding up well; brokerage, insurtech and even crypto are slowing down significantly, he suggests.

Despite the slowdown, however, Finch Capital believes the sector is heading for a soft landing. This is not least because investors are still sitting on record amounts of dry powder destined for investments in fintechs. The capital yet to be deployed is a whopping $28 billion, according to the research.

As a result, the best fintechs will likely have little trouble raising money – and the most successful incumbents will still be able to pursue exits at attractive valuations.

Nevertheless, Vlaar thinks that the party for the fintech sector as a whole is now coming to an end. However, in the long run, this could work out well, as small fintechs in fragmented industries are forced to investigate mergers and acquisitions and other combinations.

“As investors become more cautious about where they put their money, and potentially over-invested start-ups struggling to exit, we’re likely to see a period of consolidation as many verticals are highly fragmented, creating a smaller but more sustainable ecosystem. arises,” Vlaar argues. “This shaking, while painful, is also necessary. Consolidation and more competitive investment flows, combined with still significant levels of unspent capital, will bring maturity to the sector.”

Nevertheless, the slowdown may come as a disappointment to policymakers across Europe, who have welcomed the emergence of a thriving fintech sector on the global stage. Activity in Europe has rivaled the US for the past two years, but now it looks like it will be difficult to keep up.