- Fintech is Europe’s biggest startup sector by investment, attracting a record $21 billion in 2021.
- A war for talent; more regulation; and slower routes to IPO will dampen 2022, predicts Finch Capital.
- This story was published in October 2021 and updated in December 2021.
Europe’s panoply of fintech startups operating everything from challenger banks to complex payments tech had a gala 2021, raising an estimated $21 billion, according to analysis by venture capital firm Atomico.
But the fizz is set to go out of the sector in 2022, predicts Dutch VC firm Finch Capital, which has backed UK mortgage broker Trussle and lending platform Zopa.
In an October report, the investment firm points to an increasingly fraught war for top tech talent, rising interest rates, the cooling of IPOs and SPACs, and increased regulatory scrutiny of the sector as impediments to the growth of fintech in Europe.
“We believe at some point the music will stop,” Radboud Vlaar, partner at Finch Capital, told Insider. “It’s possible that in 2020 companies overreacted to the threat of COVID-19, but we’re seeing signals for 2022 that suggest that the party might soon be over.”
Many businesses are valued at revenue multiples north of 50x and as high as 100x, Vlaar added. A high valuation for a company generally indicates that investors are optimistic for its future growth, but the ability for fintech startups to meet these expectations may be impeded by higher costs triggered by the expense of talent, and greater competition.
"There will be an impact on valuations from the talent war, higher salaries means higher costs, increased dilution from equity offers and lower profitability," Vlaar said. "When you raise a big round you need to hire a lot of people and if you can't hire them then your growth plans will fall short."
"It's true that it's easier to shop around for a new job when working remotely but employees are less sticky as a result," he continued. "There will be a correction, and there are not enough people in the market."
Finch's report points to the business-to-business insurance sector as one where startups have experienced layoffs, despite record funding amounts.
A cooling off for market debuts
Bloated valuations have implications for fintech firms' ability to exit.
Some 26 SPACs have listed in Europe this year, raising $6.6 billion. Over the same period in the United States, 433 new SPACs have raised $118 billion, according to Finch's report. Elevated capital markets in the US have allowed a number of consumer fintech companies to list, but the same cannot be said for Europe where the biggest and only notable fintech listing this year has been money-transfer service Wise.
"What we're seeing is a lot of M&A in the $50 to $500 million valuation bracket but not many exits at price points above that," Vlaar said. "Companies at very high valuations might struggle to go public at those prices, especially if public markets sour and become more focused on good metrics because a lot of unicorns are unprofitable."
The report concludes that exits will be "limited" for fintechs, especially those valued at $1 billion or higher.
"As investor appetite in new listings wanes, so could premium pricing," it stated. "Expect pricing ranges to be challenge and perhaps listing valuations lower than last priced round valuations."
Regulatory scrutiny is another cloud on the horizon, thanks to the ongoing fallout from the collapse of fraudulent payment processor Wirecard, trading app Robinhood's tussles with the SEC in the US, and running battles between cryptocurrency firms and watchdogs.