When clouds are low, who keeps flying?

Fewer Fintech VC deals drive flight to quality and diversity of exits.

📊Trends: Fintech VC investments dropped by 43.8% to $34.6 billion in 2023. Payments, alternative lending, capital markets and CFO stack startups received most funding, with generative AI and open banking supporting their attractiveness. Pre-money valuation step-ups declined across all deal stages with a median of 1.5x, a 26.8% decrease from 2022. The trend towards lower valuations may continue into 2024, if companies keep depleting their cash reserves.

📎 B2B: in 2023, Fintech VCs showed a marked preference for B2B companies. They received 72.1% of the total funding, up from 40.6% in 2019, while B2C fintechs garnered only 27.9%. This shift reflects investor confidence in B2B's superior exit opportunities, the oversaturation of B2C fintech, with a backdrop of high interest rates and geopolitical tensions. These economic pressures have impacted consumer financial stability, whereas B2B firms seem to have more reliable revenue streams and access to larger markets.

🛫 Exits: with $5.9 billion in VC exit value across 185 exits, 2023 had the lowest exit value since 2016 and the fewest exits since 2020. M&A activity also fell by 33.6% to $47.1 billion. Despite these downturns, there has been relatively robust levels of (late-year) M&A and buyouts. It suggests a Fintech market potentially poised for consolidation.

In short: while volumes are markedly down at the top of the Fintech investment funnel, the liquidity overhang and transaction backlog might start clearing if IPO conditions improve and if startups reset both their valuation expectations and operations to adjust to normalized conditions. Alongside stronger M&A and buyout exit trends, structured growth equity strategies could offer investors better liquidity options and keep challenged startups flying at revised altitude.