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A few years can make all the difference when it comes to investors' tastes.
Venture capitalists have, at long last, seemed to soured on a sector that used to be their favorite place to park their money. Last year, VC investments in financial technology companies fell by more than 50 percent from $89.5 billion in 2022 to $43 billion in 2023, according to data compiled by Crunchbase. That marks the lowest level of funding for fintech in six years.
This capital slump is quite the reversal of fortune for the industry, which at its peak in 2021 received $143 billion in funding-more than any other sector-and 8,540 deals. During the course of that one year, the Collison brothers' payment processor Stripe reached an all-time valuation of $95 billion. Plaid co-founder and CEO Zach Perrett landed a $425 million Series D funding round for his data network that connects users' bank accounts with the apps they use. Chris Britt, the founder and CEO of Chime, also netted $750 million in funding and a $25 billion valuation for his fintech that partners with regional banks to provide free financial products.
Even prominent names and heady valuations were not enough to insulate fintech entrepreneurs from VCs changing their tune. When Stripe raised a new $6.5 billion funding round this past March, it came at a steep discount and a new valuation cut roughly in half to $50 billion. In this tough environment, the number of deals also declined significantly-decreasing by more than 40 percent from 7,921 closed in 2022 to 4,513 in 2023.
Farther co-founder and CEO Taylor Matthews secured one of those deals. His remote-first wealth advisory platform closed a $31 million Series B in September, boosting its valuation to $131 million. Matthews says securing that level of funding last year was a challenge, and he knew it would be going into the round. "It was a somewhat scary prospect to raise in that particular moment, because everybody can read the newspapers," says Matthews. "We kind of bucked the trend."
This funding squeeze is not endemic to fintech. After years of cheap money and wide-open checkbooks, founders across industries faced a tough capital environment in 2023. Startup funding hit a rut. Crunchbase found that overall VC investment fell by 38 percent last year from $462 billion invested in 2022 to $285 billion in 2023-the worst in six years-and that downward trend is not expected to reverse in the new year. At the same time, entrepreneurs struggled to secure credit as banks and other lenders stiffened their standards in a higher interest rate environment.
One of the few sectors to withstand this across-the-board capital pullback has been artificial intelligence, which along with manufacturing outpaced fintech investment for the first time in six years, Crunchbase data showed. While in the fintech drought, no stage was spared. Late-stage investments fell to the lowest level since 2017, while early-stage companies received the least amount of funding since 2016. Only seed rounds, which were still below the past two years, matched pre-pandemic levels.
Percent founder and CEO Nelson Chu, whose private credit marketplace landed on the 2023 Inc. Regionals list after growing by 1,329 percent in two years, felt the pressure first-hand. After starting to raise his company's Series B round in 2022, Chu says, "It took a little bit of luck--which in startups, you definitely have to have a little bit of luck--to be able to actually drag the rest of the round over the finish line," in 2023.
That bit of unfortunate luck was the implosion of Silicon Valley Bank. The New York-based startup closed its $30 million round in May after the string of regional bank failures, which Chu says opened a lot of investors' eyes to what private credit was and the value that Percent could bring to their other portfolio companies--stepping in during times of crisis when traditional banks could not. That became his new selling point. When you're pitching investors during a down cycle, Chu says, you have to stay flexible and seize whatever opportunity--or timely narrative--you can. Once you spot the "lean in moment" when VCs ask you to elaborate, you've found the hook that is likely going to work at other firms as well.
"The companies that are capturing the zeitgeist of the right now will continue to raise money," he says. That "helped us go from 'I'm not sure how we're going to close this deal' to 'Wow. We're oversubscribed.'"
While Percent adapted to the changing market dynamics in real-time, Farther's team found success by sticking to their well-honed pitch, which focused on metrics and fundamentals. "We had strong underlying unit economics. We had clear product market fit. We didn't raise at a crazy valuation in Series A-which by the way, didn't feel great at the time," recalls Matthews. "And it didn't hurt that our growth from 2022 to 2023 was 8x."
The entrepreneur thinks the downtick in funding is largely a result of the outsized rounds and valuations that fintech founders enjoyed in 2021. Now, he says, those same companies are struggling to grow into their investors' expectations and are more focused on avoiding a down round, let alone increasing their valuation.
All of that has come to a head in a much tougher macro environment, which has hit fintech especially hard. Businesses in the consumer loan space have been crushed by higher interest rates. Startups servicing other startups have been forced to contend with tighter client budgets, while the types of companies that people most commonly associate with fintech--neobanks, personal finance products, and robo advisors--have struggled to overcome high customer acquisition costs and make the unit economics work. Plus, the industry is a lot more crowded with competition.
"There's so many successful companies out there that it's become harder and harder to find a differentiation point," says Matthews. "If you're entering the market now and you haven't already found that very clear niche, then that is really is particularly challenging."
Even in a funding slump, fintech founders say there are still plenty of pockets of opportunity. Matthews sees bright spots in his own sub-genre of wealthtech as well as other recession-proof areas such as insurtech, or technology aimed at the insurance industry, and regtech, which includes technology to help companies comply with government regulations. For his part, Chu thinks 2025 will be the year that "unsexy" fintech come back into vogue for investors, and he sees vast potential for technological innovations that can grease the wheels of capital markets as well as the Federal Reserve's new FedNow program, which provides instant transfers between banks.
Entrepreneurs need to remember this funding pullback, he says, is not the deathknell for fintech. "This reversion to the mean is very healthy for the industry," says Chu. "What happened in '21 and '22, I think, gives venture a bad name in the grand scheme of things, because it's not steeped in reality."
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