Fintech funding in 2024: How to stand out from the crowd
When examining the fintech funding landscape, which has experienced a rollercoaster ride since 2020, the classic chicken-or-egg dilemma comes to mind.
Securing investment has become increasingly challenging for fintechs globally
In 2024, securing investment has become increasingly challenging, with fintechs required to demonstrate strong financial performance, innovative products, and scalable business models. Yet substantial funding is typically needed to achieve these very milestones.
A number of fintech start-ups have closed down over the last year after failing to secure the necessary funding to continue operating. This raises a pressing question: how can fintechs thrive and secure the capital they need in today’s economic environment?
Here, FinTech Futures dives into the latest funding trends to uncover where the money is going, with insights from industry experts on how start-ups can navigate this competitive landscape and attract the investment they need.
Fintech trends for H1 2024
The first six months of 2024 brought considerable challenges to the global fintech market, with total investment dropping from $62.3 billion across 2,287 deals in H2 2023 to $51.9 billion across 2,255 deals in H1 2024, according to KPMG’s Pulse of Fintech report.
“The high cost of capital and geopolitical uncertainty linked to conflict and elections, have put a significant damper on all global investments so far this year, and the fintech market isn’t immune to that,” explains Karim Haji, global head of financial services at KPMG International.
As per KPMG’s report, only five fintech deals exceeded $1 billion globally during the first half of the year. These include the $12.5 billion acquisition of US-based Worldpay, the $6.3 billion buyout of Canada’s Nuvei, the $4 billion acquisitions of both US-based EngageSmart and UK-based IRIS Software Group, and the $1 billion purchase of Canada-based Plusgrade.
In the Americas, total fintech investment declined from $38.5 billion in H2 2023 to $36.7 billion in H1 2024, with the US seeing a sharper drop from $35 billion to $27.4 billion.
Speaking to FinTech Futures, Dexter Wilson, senior director of strategic partnerships at BNY, notes: “We [BNY] have noticed a general slowdown in the VC investing space during the 12 months from the second half of last year to the first half of this year.”
Despite this, deal volume in the Americas increased from 1,066 to 1,123, while the ASPAC region also saw a rise, from 406 to 438 deals.
The starkest slump has been in the EMEA region, which saw a 40% decrease in fintech funding, from $19 billion in H2 2023 to just $11.4 billion in H1 2024.
Ongoing geopolitical uncertainty – including elections in the UK and France – along with the high interest rate environment, kept investment “subdued” says KPMG, with the UK accounting for the largest share of fintech investment in the EMEA region, attracting $7.3 billion.
What are investors looking for?
In the aftermath of the inflated valuations of 2021 and subsequent down rounds in many cases, investors in 2024 are being highly selective, applying stringent criteria when choosing which companies to back.
“If you are a seed trying to go to a Series A, you have to stand out,” states Wilson. But this raises the crucial question: how do start-ups differentiate themselves in such a competitive landscape?
Well, as could be predicted, if your company leverages GenAI, you’re likely to attract attention.
Companies deploying GenAI are of “great interest”
Robin Scher, head of fintech investment at Lloyds Banking Group, tells FinTech Futures that GenAI companies with “proven use-cases are also of great interest”, but he cautions that there’s also “understandable wariness from investors in this space due to inflated valuations”.
Furthermore, Scher adds that fintechs addressing “industry-wide problems”, such as financial crime prevention and cybersecurity, are garnering even greater interest from investors.
“Early-stage companies need to be able to prove that they can differentiate themselves in a crowded market. A founder with a clear strategy and vision is key, with the credibility to execute on their goals. Even at an early stage, there must be consideration not just for delivering revenues, but also for delivering a path towards profitability,” notes Scher.
On the subject of revenues, Senofer and Adrian Mendoza from Mendoza Ventures advise that fintechs should showcase revenue streams that are “not driven by interchange fees” and demonstrate how they manage the “traditionally long sales cycles for banks and credit unions”, as these factors are crucial when evaluating investment opportunities.
Looking ahead, Wilson reveals that another area of focus for BNY in particular is “quantum readiness”.
“I think the event they call Q-Day is now three to ten years away. If we wait until a true quantum computer is available, it’s probably too late to protect your company against it.
“So how do we prepare for it? It is on our radar. Our clients and regulators are starting to ask us about what we are doing in this space: How are you ensuring protection against Q-Day?”
Valuations
When speaking with fintech investors, one topic that frequently comes up is valuations. Valuations offer insights into the current state of the market and indicate the level of appetite for new deals.
Scher remarks that valuations are still substantially lower compared to the highs of 2021, with many companies that raised funds during that period now facing down rounds or needing bridging finance.
“This was a bitter pill to swallow for some founders in 2022 and 2023, who would compare their fundraising goals during these years to 2021 raises and struggled to understand how they were only able to attain a fraction of the valuation compared to 2021.
“Many founders tried to conserve capital, even at the expense of growth, as they had the belief that the market would come back and return to the boom valuation numbers of 2021. I think that mentality has subsided, with a general understanding that current valuations are the norm and the highs in recent memory were an anomaly.”
Meanwhile, across the pond, the US is experiencing similar trends. Wilson observes that while market values have been improving, some remain “overvalued”, particularly in sectors like information security, cyberspace, AI protection, and governance.
“I think given the newness of that area, people are still not sure how to really value it,” he explains. “However, valuations in most other sectors have definitely come down.”
Predictions and concluding thoughts
Predicting market trends with precision is always challenging, but there appears to be a general consensus on two key points: a preference for early-stage deals and a gradual increase in investment levels.
Wilson describes Series A and B firms as the bank’s “sweet spot”, noting that while seed and seed plus stages are “interesting from a strategic point of view”, their technology needs to be “exciting and new” to justify the risk of an early investment.
Funding trends are expected to increase slowly
He adds: “When you get a Series C, especially, with these new valuations, it is just too expensive for us to be investing.”
Anton Ruddenklau, global head of financial services, fintech, and innovation at KPMG, highlights that the “volume of early-stage deals has been thriving both because of the interest in new technologies, such as AI applications, and newer business models to meet the changing nature of the financial services sector”.
Additionally, Scher expects that “investment into the sector will increase slowly but steadily from current levels”, while valuations will “stay on or around the level they are now” for the “medium term”.
Looking further into the future, the Mendozas are bullish on the prospects for decentralised finance (DeFi), viewing it as the “building blocks for the next generation of fintechs”. Additionally, they predict that fintech will start “pushing into the green and climate tech space in the next 3-5 years”.
Ultimately, despite signs of a gradual increase in funding, early-stage companies will still face significant challenges in securing capital, particularly in crowded fields like fintech.
Discussions with investors reveal that the emphasis is often placed on the founders themselves, sometimes outweighing minor issues with their products. Founders who fail to demonstrate their ability to collaborate effectively with their teams, engage with shareholders, and influence their boards are unlikely to attract the crucial support they need.
