Venture capital (VC) funding for tech start-ups is experiencing a significant global slowdown, according to new data from analyst firm CB Insights.
Research also reveals that FinTech and RegTech companies are in the vanguard of a steep decline in investor confidence worldwide.
The latest report from CB Insights finds that Q2 funding to all tech ventures decreased quarter on quarter by 23 percent to $108.5 billion, the biggest quarterly fall in a decade.
Mega-rounds (of $100 million plus) fell 31 percent from the previous quarter, while M&As are also cooling.
Deals in Europe fell by 13 percent, though this was the smallest percentage decline in all regions. Despite the grim news, global funding and deal totals (7,651 last quarter) remain above 2020 levels.
While the figures are a concern for all start-ups, alarm is rising among FinTech players as fears of recession grow. The sector has been positioned as key to economic recovery by UK politicians, notably leadership contender Rishi Sunak.
For the first time since Q4 2020, FinTech ventures accounted for less than one-fifth of all start-up investments worldwide, according to CB Insights.
Q2 funding to FinTech start-ups fell by one-third against the previous quarter to $20.4 billion, the second quarterly decline. In Q1, funding fell to $30.3 billion from $38.4 billion in Q4 2021.
Deal numbers also fell for the second consecutive quarter (to 1,225 from 1,482 in Q1).
All world regions have experienced a steep decline in FinTech funding in the year to date, with average deal sizes falling to $23 million, against £32 million in FY 2021.
These trends are significant for both ends of the funding spectrum. Early-stage deals comprise 60 percent of all investments, while unicorn (billion-dollar start-up) births in the sector have fallen to a six-quarter low.
The number of FinTech M&A exits is also tumbling, according to the report.
The FT has joined the chorus of fears for FinTech firms. In an 18 July report from New York, it observed that almost half a trillion dollars has been wiped from the value of listed FinTech companies this year (measured against their highest valuation).
Shares in recently listed FinTechs have fallen an average of more than 50 percent since the start of the year, according to the FT’s analysis – compared with a 29 percent drop in the Nasdaq Composite.
“Their cumulative market capitalisation has fallen $156 billion in 2022. [But] if each stock is measured from its all-time high, around $460 billion has been lost,” clarified the report.
But why is this happening?
According to the FT, it is because of concerns about “rising interest rates, lack of profits, and untested business models as the economy heads towards a potential recession”. All this has put FinTech “at the sharp end of this year’s sell-off”.
The FT quotes Dan Dolev, analyst at Mizuho, saying that FinTechs were “the first part of the tech sector to benefit greatly from Covid, because everyone was stuck at home and buying stuff online. […] Now they are overcorrecting to the downside ahead of other sectors too.”
Meanwhile, the UK RegTech sector is also experiencing a funding slowdown. Figures published by RegTech Analyst this week reveal a 53 percent year-on-year VC decline to $331.8 million.